Banking regulator outlines likely response to housing investor surge

Investors remain in the firing line as regulators attempt to cool a hot property market.

Rapidly rising property prices in the big cities have forced the Reserve Bank and Australia's banking regulator APRA to confront a threat they denied existed for far longer than they should have - the threat of a property price bubble.

Now there is a strong expectation that intervention is on its way.

"At this stage, I think it'd be very much about trying to intervene to tame the investor market because the one thing they don't want to do from a policy response is to actually squeeze out first home buyers," said CLSA banking analyst Brian Johnson.

The Reserve Bank governor's latest observations reinforced that view.

"We're keeping a close eye on the build up of credit to investors in the housing market, not to owner-occupiers per se and certainly not to first home buyers. They're not the issue," said Glenn Stevens.

"As we've said, we are in discussions with APRA about whether there is more that ought to be done to reinforce sound lending standards."

The banking regulator's chairman gave the clearest indication of his thinking before the Senate Standing Committee on Economics this week.

"We use the regulatory capital framework to create incentives for prudent lending and to ensure that while institutions remain free to decide their lending parameters, those undertaking higher risk activities do so with commensurately higher capital requirements," said Wayne Byres.

That means a bank will have to put aside more capital to support investment property loans, raising interest rates for borrowers.

There might also be a tougher debt serviceability test for investors, which means they might need higher deposits.

Tax changes the real solution

Brian Johnson said it also suggests regulators are getting impatient with the banks.

"The first leg in all of this is kind of what you'd call the behind-the-scenes move where APRA and the Reserve Bank hassle the management of the banks," he said.

"If that doesn't work, they hassle the board members, and if nothing changes, they then come out and they do something quite publicly."

Real estate representatives want action, but say investors have been unfairly cast as the villains.

"Possibly the warning should have went out 12 months ago, and the warning should - not so much a warning to investors - it should be to the banks saying, 'If you're going to lend to investors, you should be looking for 15 per cent deposit', having a stronger deposit knocks out a lot of the speculation," said Malcolm Gunning from the Real Estate Institute of NSW.

How the banks respond to any restrictions will determine who bears the pain.

"If we're in a very competitive dynamic, then it's probably bad for shareholders," said Mr Johnson.

"If you get basically the bank's move in concert to pass this on, then it's probably bad for the property market."

He says the real solution to addressing Australia's property market imbalance does not lie with the country's regulators or the banks. It is a matter for the politicians.

"The only thing that works is really reforming tax incentives, and in Australia what creates a lot of this is the double whammy of the negative gearing tax deduction plus the concessional capital gains tax rate," he said.

Changes no politician is likely to take on.