ANZ warns even tougher home loans restrictions could be on the way

People look at a sale board out the front of a property in Brighton on June 17, 2011 in Melbourne, Australia. Photo: Quinn Rooney/ Getty Images.
  • Australia’s east coast housing market is slowing down as APRA’s restrictions on interest-only lending start to bite.
  • Despite a moderation in housing credit growth it continues to outpace growth in disposable incomes, increasing household leverage.
  • ANZ Bank says tighter lending restrictions could be introduced if this continues, especially if housing market activity begins to pickup.

Australia’s east coat housing market is slowing down after years of rollicking price growth.

According to data from CoreLogic, prices are now falling in most capital cities, especially in Australia’s largest housing market, Sydney, coinciding with the introduction of tougher restrictions on interest-only lending from APRA in March last year.

As seen in recent data from the Reserve Bank of Australia (RBA) and Australian Bureau of Statistics (ABS), both new lending and credit growth for housing purposes is softening, led by the investor segment.

It suggests that APRA has succeeded in curbing what were widely perceived to be building financial stability risks, leading some policymakers, including Australian Treasurer Scott Morrison, to openly discuss the possibility that tougher macroprudential measures may relaxed in the period ahead.

Based on a speech delivered by RBA Governor Philip Lowe in Sydney earlier this month, it’s clear the RBA is more comfortable with recent developments in the housing market.

“A while back we had become quite concerned about some of the trends in household borrowing, including very fast growth in lending to investors and the high share of loans being made that did not require regular repayment of principal,” Lowe told the A50 Dinner.

“Our concern was not that developments in household balance sheets posed a risk to the stability of the banking system.

“Rather, it was more that they posed a broader macro stability risk – that is, the day might come, when faced with bad economic news, households feel they have borrowed too much and respond by cutting their spending sharply, damaging the overall economy.”

However, in light of recent information, Lowe indicated that those risks had been reduced.

“From a macro stability perspective, the situation looks less risky than it was a while ago,” he said, adding the disclaimer that the bank continues to watch “household balance sheets carefully as there are still risks here”.

So with risks subsiding in the housing market, does that mean tighter lending restrictions could be potentially watered down or removed completely in the period ahead?

If this chart from ANZ Bank is anything to go by, it could be quite a while yet.

Source: ANZ Bank

It shows Australia’s household debt to disposable income gap, revealing that even with a moderation in housing credit growth over the past year, household debt continues to grow faster than disposable income.

Essentially, household leverage is continuing to increase.

“The gap between household debt and income growth has narrowed a bit from its recent high and is likely to narrow further in the December quarter given the expected pick-up in household income growth with employment growing a robust 0.8% in the quarter and wage growth as suggested by the wage price index and average weekly earnings looking okay. But we are still some way from the gap being eliminated,” says David Plank, Head of Australian Economics at ANZ.

And even if growth in household debt continues to slow, Plank points out that “with household debt being close to double disposable income it will actually require the growth in household debt to slow well below that of income in order for the ratio of household debt to income to stabilise, let alone fall”.

So, if household leverage is continuing to increase, why is the RBA and other regulators sounding more confident that financial stability risks in the housing market have been reduced?

Planks says its likely due to the composition of new housing credit growth.

“The change in the RBA’s thinking is motivated by the shift in the type of debt being taken on by households more so than the amount,” Plank says.

“Specifically, the slowdown in lending to investors and the significant drop in the share of interest only mortgages.”

While the RBA appears confident that the switch to owner-occupier principal and interest loans is working to curb risks in the housing market, Plank isn’t so sure that it is.

“A key concern we have with the RBA’s comfort with recent household debt trends is whether the slowdown in household debt growth is likely to be sustained with interest rates so low,” he says, pointing to a recent rebound in auction clearance rates which tend to lead changes in house prices.

Source: ANZ Bank

If the recent strength in auction clearance rates is sustained, and the historic relationship between them and annual house price growth is maintained, what are the odds that growth in housing debt will fall below that of growth in household disposable incomes, allowing leverage to stabilise?

To Plank, the answer is next to none, creating doubts as to whether financial stability risks are being reduced.

“Our analysis on the debt/income gap suggests that the RBA’s comfort with how things are evolving on the debt front may be misplaced,” he says.

“The first sign of this will be clear evidence of recovery in house prices, possibly already underway, which will likely be followed by a reacceleration in debt growth.

“If things develop in this fashion it will be interesting to see whether the RBA maintains its focus on clear progress toward the mid-point of the inflation target range as the key to the setting of interest rates.”

With Australian wage and inflationary pressures still incredibly weak, Plank suspects the RBA, in conjunction with APRA, may initially respond to a renewed pickup in house prices and household debt by introducing even tougher macroprudential restrictions on new lending.

“We suspect that the first port of call to any signs of a reacceleration in household debt will be additional macro-prudential policy, thus allowing the RBA to [leave interest rates on] hold until the evidence of the desired progress to the [inflation] midpoint emerges,” he says.

While a simpler option would be for the RBA to lift interest rates, something Plank says would usually help to bring household debt growth down towards that of household incomes, that would only put a rocket under the Australian dollar and further constrain already stretched household budgets for those with a mortgage, potentially placing downward pressure on economic growth and inflation as a consequence.

It would risk attempting to solve one problem by potentially creating several more, including those that could raise financial stability risks in both the household and banking sectors.

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