A lot is being spoken about what the regulators are doing now to slow down investor lending so how effective has it been and what more are they likely to do.  Hear what our finance expert, Andrew Mirams, has to say.

Transcript:

Kevin:  There’s a lot of talk about the regulators are doing and how much they’re pinning down investor lending, and without investor lending, obviously, we’re not going to have investors. Without investors, we’re not going to have rental properties. So, I’m just curious to know if the regulators have really changed investor lending all that much. I want to pose that question of Andrew Mirams, regular contributor for us in the show. Andrew, of course, from Intuitive Finance.

Andrew, can you answer that question for me? Have they really changed investor lending that much?

Andrew:  Good day, Kevin. Yes, it has changed quite a bit.

Kevin:  Has it?

Andrew:  In the last couple of years, we’ve had a fair bit change going on in our markets where just all the lenders are being scrutinized a lot more. And to be honest, a lot of it is for good. We don’t want boom-bust cycles, so really they’re looking at just trying to moderate the markets and make sure people aren’t over committing themselves. So things have changed.

Kevin:  How are they doing that? Are they doing it by restricting the banks in terms of how much they can lend to how many people?

Andrew:  Yes. Some of the things they’ve done… When we talk about the regulators, we’re talking APRA (Australian Prudential Regulation Authority, ASIC) and the Reserve Bank, and they’re called the Council of Financial Regulators. They’re all basically looking and saying, “We need to make sure we have a balanced market.”

So what are some of the things that they have been doing? The first thing they took the bat out to was high LVRs. Investors who are buying off the plan or buying investment property at 95% and 97%. The first thing they said was “No. We think that’s dangerous. That’s fraught with danger. Any little market movement, you’re going to be sitting on clients with negative equity.

And that’s probably happened in some of the mining towns in the boom-bust cycle we’ve seen in outer Australia, in WA and Queensland, where people have really leveraged in when things were going well and now a lot of those clients are sitting on negative equity.

That was the first thing they changed – the maximum loan-to-value ratio for how much lending you could get against a property as an investment, and that’s now limited back to 90%, and even some lenders went beyond that where they had larger exposure and limited that back to 80%.

The next thing the lenders did was start to then look at some postcodes and where they might have exposures and things like that. Again, this is being driven from the top down, so they’re saying, “Look, where do you think you have exposure? You need to start limiting that.”

The banks then started to look at a whole range of postcodes across the country, not probably by surprise, Kevin, where we a lot of cranes up on corners and a lot of development going on. And the banks have now said “You know, we have a really high exposure in certain postcodes. It’s a bit like a house of cards that if one was to fall, gee, maybe we’re at risk with all these things, and if people all walk away from them, we have a real issue in holding that sort of property.” So they started to restrict then on postcodes. The banks have probably done that themselves, just looking at where they may have exposures.

What a lot of the lenders were doing and what APRA in particular asked all the lenders then to do was “Here are six scenarios. Send us in your lending calculators.” What they were able to ascertain was there was a massive difference. There were hundreds and hundreds of thousands, and you’ve heard me speak, Kevin, about getting to the right lenders first and things like that in the past.

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