Price controls, like most government messing with the market, just forces pressures to pop up elsewhere. It fixes nothing. There’s a lesson for APRA here…
I remember a polish friend of mine telling me about life behind the iron curtain.
He was telling me a story about trying to buy a TV. Now in those days, the government set the prices on a lot of things. TVs were one of them.
For some reason, the government decided to make the price of TVs very cheap. Perhaps they wanted to make sure the people were entertained and inspired.
(Perhaps they just wanted to keep them stupid.)
At any rate, there was one price for TVs where ever you went. And if you were in the business of making TVs, there was one price you could get for your merchandise.
And with prices set at impractically low levels, TV manufactures weren’t inspired to produce very many.
But consumers were very inspired to get their hands on the cheap TVs. As a result, there was a massive shortage of TVs. There just wasn’t enough to go around.
And if you wanted one, you had to line up at the electronics store. Not just for a few hours. Potentially for days. If you wanted to keep your place in the queue, you had to come back day after day, or you’d lose it.
My friend remembers calling in sick for a week just so he could hang out in a queue for televisions.
And of course the black market flourished. There were a lot of people who didn’t want to line up for a week to get one. He remembers people offering him 4 or 5 times the price he paid for his.
And if it wasn’t for the prospect of lining up again for a whole other week, he probably would have sold it.
The point is, that if we assume that the government was trying to do its citizens a favour (always a big assumption to make!), this price control policy was a total failure.
Because sure, people paid less at the checkout. But they had to take a full week off work to do it. So you paid the sticker price, plus whatever a weeks worth of work is to you.
Most probably, once you take account of your lost time, you end up paying a much higher price than you would of in a free market.
And you end up encouraging black markets and crime.
No one wins.
I’m thinking about all this when I read the back-patting that’s going on about APRA’s new lending limits. I’ve covered it before, but APRA is putting pressure on the big banks to get their lending to property investors under a growth limit of 10% a year.
Banks are dragging the chain, but it seems to be taking effect, with some reports that the investor share of lending as fallen to the lowest level in several years.
From the Australian Financial Review:
One of the country’s biggest mortgage brokers, Mortgage Choice, says the clampdown on lending to landlords has dragged property investors’ share of its loan approvals to a 20-month low.
In a sign banks’ tighter credit standards are having some impact, Mortgage Choice says the proportion of its loan approvals going to property investors fell from 34 per cent in May to 30 per cent in June, the lowest share since late 2013.
“It’s a 12 per cent reduction in investor loans in a very, very short period of time,” chief executive John Flavell said.
While there have not been official figures yet confirming this trend, Mr Flavell said it was the first data pointing to a slowdown in investor lending triggered by banks’ tougher credit policies.
…In particular, he said some first-home buyers trying to enter the market as property investors were finding it harder to get credit from banks under the new lending criteria.
Good outcome. Punish first home buyers.
My problem with these APRA limits is that they’re just so blunt. 10% growth, across every market across the entire country.
If you’re trying to take the heat out of a strong market (Sydney), it’s a pretty round about way to do it.
And what happens when you put artificial limits like this on a market? Well, just like a market for televisions, the pressure will only show up somewhere else.
So maybe the banks just funnel lending from other areas and other markets into Sydney. Or they’ll cut back on the riskier and least profitable lending first (young buyers).
But the underlying market demand hasn’t changed. The market conditions haven’t changed. The market is still attractive to owner-occupiers and investors. Sellers still want to sell.
And so maybe we’ll see a shift away from the big banks to smaller banks and non-bank lenders. But they might just charge more for the privilege in an artificially constrained market.
And so it’s ordinary buyers and investors that end up paying more.
And why? Because APRA wants to take a softly, softly approach.
Stop beating about the bush. Find what the problem is and fix it. If you’ve got a problem with Sydney, deal with it. Don’t make the rest of the country, and ordinary buyers, foot the bill.
Anyone finding it’s tougher to get finance these days? What market are you in?