APRA could crush property markets: Craig Turnbull

GUEST OBSERVER

I am in a very angry mood. Over the last two weeks the message has gone out from the Reserve Bank’s hatchet men, Australian Prudential Regulatory Authority (APRA), for the banks to pull their heads in and slow down lending to investors. The Big Banks, being loyal soldiers (and because they are regulated by APRA), have marched to the tune and are swinging their lending axes.

You see the RBA is stuck between a rock and a hard place. They believe we need a lower Australian dollar to help our exporters and terms of trade and push our economy along. The simple mechanism to move the value of a floating dollar downwards in the international marketplace is to lower interest rates. This makes the return on a currency lower and therefore less attractive to investors who will sell that currency and exchange it for another with a higher yield.

So the Reserve has been on a lowering of interest rates track for some time now, but our dollar remains stubbornly above the maximum 75c number they would like to see. Some insiders are suggesting that The Reserve is targeting a 70c figure. They need the US dollar to get stronger relative to the Australian dollar, while lowering Australian interest rates.

The Reserve needs lower rates to kickstart the economy and have businesses borrowing. The Australian government has helped this along with budget measures designed to give incentives for business to invest now to get immediate tax relief.

The big challenge is that lower interest rates, usually mean property buyers & investors get very excited and start buying up big, pushing up markets. This has become a really big problem and a bit of a political football. We have seen massive gains over the last three years in Sydney – about 40% and around 24% in Melbourne. Elsewhere though the markets are flat. So we are seeing very uneven movements in the various markets around the country.

But all the “white noise” from the media has been focused on Sydney, which they are purporting to be the “Australian” market which is ridiculous. It is nonsense to assert there is a boom anywhere but Sydney – a boom incidentally which history will show us is just about done. At least for this cycle.

So what is the Reserve to do? The need a lower Australian dollar and lower interest rates, but also to calm the (Sydney) property market.

One other thing they can do is get their dirty work done by APRA. All APRA needs to do is lean on the banks to restrict lending to investors and the money supply for borrowing will dry up overnight. Which it has. There is nothing more potent in stopping a property market dead than making borrowing next to impossible. If you can’t pay for a property because you can’t borrow the money to do so, markets will stop. And it is happening right now.

The even deadlier result of the banks slash, hack and pull-back is that they have all but stopped lending to developers. That means that very few new homes and apartments can be financed, which will restrict the future supply of housing – and ironically, if it lasts for more than a few months, will lay the foundations for another boost in prices because supply cannot keep up with future demand.

The property national market is one of the most important economic drivers for our nation and it is being hamstrung – simply because the Sydney market is booming.

Why not just apply macro-prudential controls (restricting lending) to Sydney only?

Why crush the rest of the capital city markets?

Our good friends over the ditch in New Zealand seem to be eminently more sensible than the Australian bureaucrats and political leaders. Their “market” is booming too – but only is it an issue in their major city, Auckland. Solution – apply macro-prudential restrictions to Auckland investor purchases only.

Why can’t we slow down the booming market in Sydney be doing the same?

So I’m angry. There is little common sense nor good economic management by smashing the whole of the Australian property market over the head with a hatchet full of APRA and Big Banks, when a surgeon’s knife could more easily cut out the cancer that is the Sydney boom.

What should property investor’s be doing now?

Certainly not trying to borrow big to buy in to an overheated market. A very sound strategy could be using the lower interest rate environment to reduce debt – rates won’t always be this low. And look for alternative ways to get in to the property market, because pretty soon, many people will be frozen out. 

As with everything in our lives – this too shall pass. Lenders need to lend. Or they are not lenders. It may be as short as a month but it could go as long as six months. Hard to say.

But you can expect already soft markets outside of Sydney to fall in the near term and I expect the boom in Sydney will come to a grinding halt – though will be a bit like stopping a big cruise ship, it will take some time to slow.

Let’s trust that our economic managers and regulators don’t strangle the national property market and our economy along with it.

Craig Turnbull is an author, property developer and real estate investor. He can be contacted here.