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It’s been an interesting 3 months since our last Investment Landscape, with nothing really changing fundamentally. Please click here for our view from April 2015.

IT’S ALL ABOUT THE BANKS!

There's been some sharemarket volatility related to Greece and China, but what will become a big point of discussions around water coolers in the coming months is the banks RAISING interest rates on investment loans. That's right, in the face of falling interest rates, the banks are increasing rates on investment debt!! Huh?

This is essentially a result of the booming Sydney property market and fears of property bubble in that city and to a lesser extent Melbourne. It all started with the RBA a long time ago expressing concern about house prices in Sydney, knowing that given the state of Australia's economy (see last report), it would be dropping rates further - which would be like trowing petrol in the fire. The RBA has been working with regulators, namely APRA (the bank's regulator), on measures to cool property investment. Since then, 3 key events have occurred:

  1. APRA has placed a limit of 10% annual growth in residential investment lending, and are strictly enforcing this. Banks have for months been making it tougher to qualify for investment loans, with minimal impact. More needed to be done.
  2. APRA has just forced banks to hold 2% more capital. Doesn’t sound like much, but it equates to somewhere between $30bn -$50bnn that banks will need to find to sit on their balance sheets.
  3. Importantly, APRA also increased the risk weighting they apply to home loans from 16% to 25%. This is included in the above 2% figure, but effectively means that banks have to hold significantly more capital for every loan they hold now and in the future.

These measures are profound and are having an immediate impact. They are designed to protect the financial system from a fall in property prices by slowing down investment debt growth and providing more capital for banks in the event of loan defaults.

We are now seeing a reduction in bank appetite for investment debt. Three of the Big 4 banks have raised interest rates by 0.27%-0.29% in an attempt to slow growth, whilst AMP increased existing investment rates by 0.47% and has withdrawn completely from the investment loan market!!

We’re not sure how far this has to run, but at the very least those with significant investment debt should be speaking to their finance brokers about which banks are better positioned for the above changes, and those invested directly in banks should be assessing how these changes will impact profitability and thus future dividend and share price growth.

Strategy Implications

In our last report, we had three key strategic themes, these have proved to be correct and we see no reason to deviate;

1) Falling Interest Rates

In the face of uncertainty at the time we predicted rates would fall – which they did in May.What we didn’t see coming was APRA’s hard line on investment debt and the banks responses. It’s worth noting however that rates on owner occupied loans have never been better and are coming down as banks chase these deals harder.

2) The Aussie Dollar will fall

In April the Aussie traded around 77 cents against the US, it has since fallen to 73 cents.This will have the RBA smiling, but we think it has further to go and wouldn’t be surprising to see a “6” in front of the dollar in coming months. The RBA is still stating the dollar “needs” to be lower.What the RBA wants, it gets…To benefit from this, you must have exposure to international investments.

3) Be invested, but diversify

If you hold a significant portion of your investments in banks (and depending on your situation), now may be the time to take some profits and reinvest across a broader portfolio of shares.

Our view on the Investment Landscape - April 2015

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