Why APRA, the Government and the banks have it wrong: Craig Turnbull

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Last year, the Australian Prudential Regulatory Authority (APRA), at the behest of our Federal Government, issued instructions to our major lenders – pull back on your investor lending.

APRA and the Government were rightly concerned about the growth in real estate prices over the last several years, particularly in Sydney & Melbourne. The Federal Government wanted to lower interest rates to support the broader economy, but they knew they could not do that without risking sparking yet another run up in property values.

They decided the best way they could slow things down was to squeeze the supply of loans, yet they chose to do this only for investors, who got the blame for pushing up real estate values. If they were really serious, why didn’t they have the banks slow down all lending?

The big banks did as they were told. Though anecdotal evidence shows that they did what they were told too well. There appears to have been a major pullback on investors being able to obtain a loan to buy a property – with far more stringent conditions and higher deposits required before the banks would give the nod.

The banks took it a few steps further – they have severely curtailed lending to builders & developers. Good quality projects from experienced real estate developers are now being turned down by the banks for proposals that would have been happily funded not long ago.

APRA, The Government & the Banks got it wrong – at the time the fiscal loan screws were tightening, there were very clear signs that the Sydney market, which they seem to think represent that whole Australian market, was slowing. Several years of fast growing prices meant that the Sydney market had run out of puff – prices had reached beyond the point of reasonable affordability.

It is usually at this point in every market cycle that prices slow – people just can’t or won’t pay them. Either prices have to drop, incomes have to grow (to afford the larger loans) or the cost of buying a property (interest rates) drops. Traditionally all of these things can happen, which over time restarts the property cycle. 

I do not believe that the severe tightening of loan availability was necessary or needed. I think that the market was naturally sorting itself out. This intervention has distorted the natural ebb and flow of that cycle in Sydney. And it positively smashed the already softer markets like Perth.

Perth is struggling presently because the population growth & availability of well paid jobs has slowed with the end of the mining construction boom. There are less people wanting to rent or buy at the moment – this is also typical of the bottom of a cycle.

APRA came in late, used a sledgehammer, and are still swinging it out there now. There is talk of more tightening – I think it is one step too far.  

Less loans available means there are less investors out there in the market buying property to rent out to prospective tenants.The February figures from REINSW show the overall vacancy rate for Sydney dropped 0.3 percent to 1.7 percent. It is generally considered that a 4 percent figure is a good balance between landlord & tenant. I think that there are several factors contributing to those low figures – clearly the price of housing is so high relatively speaking that people can’t afford to buy and must rent.

Also it could be that with less investors in the market, there are simply less homes to rent. This is more usual at the peak of a cycle – generally speaking as the market slows, vacancy rates rise. So the normal cycle has it seems been distorted by the regulators intervention.

If these low vacancy rates continue, rents will rise. If rents rise, then eventually prices will follow.

With the banks leaning harder on developers and denying funding, there will be less homes built for a population that across the country continues to grow steadily. I can foresee that the lower number of new homes built could mean that more buyers could be competing for fewer homes and blocks of land.

By interfering so strongly with the natural market cycle, APRA has unwittingly set the foundations for the next property boom. I trust that they have smart analysts who can see this also and will move to ease the lending restrictions sooner rather than later.

Like most people, I would like to see the value of my real estate rise over time. But rather than see price increases in huge jumps, I really would like it to be an orderly steady fashion, which provides people who want to sell or buy the ability to be able to do so within a reasonably period of time for a reasonable price. Are there ways to smooth out the property cycle?

I think if the Government is going to continue to “pull fiscal levers” to slow housing prices, then what is needed is more work on the supply side. So far most of the work has been on the demand side – first home owners grants (increase demand), interest rate movements (up to lower demand and lower to increase demand) and loan restrictions (to lower demand).

If Government could streamline the processes required to get land and apartments to market, increase densities around key transport lines and ease the tax impost on developers, more land and homes could become available which could meet demand and flatten price growth.

This could go a long way to making the booming growth of a property cycle far more steady, measured and acceptable to everyone.

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