Let me give away the ending. Because they can and because the Government is allowing them to.
The banks have silently reacted to the threat of regulatory capital restrictions (imposed by the Government) by raising interest rates on investment loans.
Every investor would cry foul if the Government imposed a 0.5% tax on their properties but not an angry word has been heard about the banks raising rates to dampen the property “bubble”. One by 0.49% but generally the big four have increased their rates on investment loans by 0.27%..
As at the end of May, there was roughly $500 billion in residential investment loans funded by ADI’s. I’ll leave the maths to you as to how much and if profiteering is going on here.
Surely, the banks could have taken the heat out of the market in a different way. Well no they couldn’t. It’s old fashioned economics. The laws of demand and supply. While there was no threat of capital controls, the banks were happy to charge the same as regular owner occupied home loans for investment loans. But when APRA threatens capital controls for any bank exceeding system growth for their borrowings thus restricting supply, the price goes up.
The blame does not entirely lie with the banks. They’re just filling their boots. The blame lies with APRA and more specifically with Government.
Instead of allowing these silly restrictions in investment lending, impose a tax of 0.5%. It’ll raise roughly $2 bio annually and most investors would prefer their money going to consolidated revenue rather than banks. The infrastructure is already in place.
Or as one property developer put it to me recently: impose a 10% tax on foreigners investing in local housing. Not only will this raise significant revenue but it will also dampen the xenophobic arguments being floated around by the uninformed.
Foreign investors will just see it as a cost of doing business.
Recently some mortgage brokers have publicly suggested that the disparity between investor and owner occupied rates could rise to as much as 0.9% by the end of the year. This won’t happen for one simple reason – substitute lenders that are not regulated by APRA. They already operate quite profitably in the market. The banks won’t want to give them a further leg-up by being uncompetitive in their major profit segment.