Regulating by stealth

How do you spin a political problem into a market one? You regulate by stealth.

This is what the federal government seems to have done this year in a move that will punish some residential property investors. In the aftermath of the GFC, the government has faced increasing pressure to wind back negative gearing, strengthen bank regulation and make housing affordable for first home-buyers.

But in its attempts to slow down the market for owner-occupiers, the government has turned up the heat on residential property investors. Giving increased powers to our banking regulator, APRA (Australian Prudential Regulatory Authority), it has by proxy intervened in market forces by effectively putting a cap on supply of funds to investors.

Through APRA’s new powers, the banking sector now faces regulation dictating what level of debt it can hold, with penalties applied if they ignore suggested levels. In response, the Commonwealth Bank, Australia’s biggest lender, recently closed the lending book for investors (but not owner-occupiers). Some commentators are interpreting this as a market-driven decision, but there’s compelling evidence to suggest otherwise.

We interpret this as a response to APRA’s new regulatory impositions, not market forces. Smaller banks have increased property-investment lending in recent months, suggesting that the market is still buoyant. Commonwealth bank itself issued a statement saying it had rejected lending to new property investors because of “regulatory commitments”.

The good news is that existing borrowers shouldn’t be affected by this change, and that sound investment opportunities — though rare — can still be found. The bad news is that this regulatory move will impact the capacity of investors to participate in the market. This may be a short-term solution to reduce prices and allow more owner-occupiers to enter the market, but over-regulation can only mean the market can’t operate as effectively. This is retrogressive and serves in no-one’s interest.