The return of the banks
So when are the banks expected to re-enter the residential construction and development market in Brisbane?
My thought process on this topic is:
- APRA has effectively homogenised the bank lending criteria at around a lending ratio of 75% of total development cost (TDC) with 100%-plus debt coverage from pre-construction commencement pre-sales.
- Pre-construction pre-sales are either difficult to achieve or exorbitantly expensive in Brisbane. However, they can still be achieved in Southern markets, in particular in Sydney, which appears to remain an undersupplied market.
- Credit in the bank is centralised. If they have two deals on their desk to consider, when one has debt coverage from pre-sales and the other does not, then they will go for the one with pre-sales. This will keep APRA happy.
- Bankers pushing “special circumstances” will be considered “outsiders” by APRA and increased capital ratios will apply. Bankers do not like being “outsiders” and loath higher capital ratios.
- APRA, the Reserve Bank, etc. have given the banks an effective free kick for increased profitability by encouraging them to increase interest rates for investment lending.
- In summary, why would banks be chasing residential construction lending, with reduced pre-sale levels, when this will cause issues for them with APRA and they can earn more profit from increasing interest rates for residential investment loans?
My conclusion is that the banks will only re-enter the residential construction and development lending market in Brisbane, in any degree of volume, after both the Sydney market has plateaued and the Brisbane market has returned to undersupply.
Even then the banks will need to change APRA guidelines, which will require considerable lobbying. Evidence suggests the banks do not appear to have much capital in the lobbying market at the present time, or it is being used for other more pressing issues.
I believe that before we see the banks return to any degree of appetite for such lending in Brisbane, we will need to see most of the Australian market return to undersupply so that the issue of “affordability” is again the in vogue pressure on politicians.
One person I discussed this with was of the opinion that it would take six months of the “affordability” issue in vogue before the government will act. My view is that he is optimistic. Look at the power prices affordability issue…