- New macroprudential measures would focus on responsible lending standards, rather than investor loan activity.
- UBS says policy makers are underestimating the potential negative impact on housing if new lending restrictions are introduced.
A third wave of macro-prudential measures may be in store for Australia’s mortgage market as regulators switch their focus to responsible lending standards, UBS says.
And the bank’s Australian economics teams said the implications are for “a potentially material negative impact on housing and the economy yet to be seen”.
“There is a growing risk the consensus view on the outlook — including the RBA — is under-estimating the downside risk from tightening lending standards, which is an important consideration to balance against the upside from household tax cuts and booming global growth.”
The analysts cited numerous areas of concern around responsible lending standards which could become the subject of increased regulatory oversight.
They said APRA has previously noted that widespread the use of benchmarks — such as the Melbourne Institute’s Household Expenditure Measure (HEM) — don’t always provide a realistic measure of expenses in mortgage applications:
The HEM is based on measures of non-discretionary basic household expenses, but doesn’t include rent or mortgage payments.
Another problem area is loan approvals where the borrower’s small net income surplus is worryingly small once projected expenses have been deducted.
And more oversight may be on the way for loan issuance through the mortgage-broking industry — which accounts for over half of new loans issued in Australia and is already the subject of an ASIC investigation.
“All this suggests that APRA is now less concerned with financial sector stability than they are with financial stability for individual borrowers and households and that they are not yet done with macroprudential policy,” the analysts said.
UBS isn’t the first bank to speculate on whether another round of macro-pru is on the way.
In December, JP Morgan economist Tom Kennedy suggested that more restrictive debt-to-income ratios may be introduced for loan applications, given the rise in household debt continues to outpace wage growth.
Those sentiments were echoed by ANZ’s David Plank in February, who said the consistent rise in household debt is being underpinned by historically low interest rates.
Any additional macro-pru will follow the two previous installments which aimed to temper the rampant growth in investor lending activity.
In 2014, APRA capped loans to investors at 10% of all new mortgages. They followed up with further restrictions in March last year, ruling that interest-only loans could make up no more than 30% of all new loan issuance.
According to UBS, both measures have “arguably been even more effective than either APRA or the RBA expected”:
UBS said the slowdown in investor credit growth suggests that previous rounds of macro-pru have had a materially negative impact on home prices in Australia’s major housing markets.
Annualised house price growth in Australia has now fallen to 2.2%, which the analysts argued is consistent with a level at which the RBA typically cuts interest rates:
However, UBS noted that APRA chief Wayne Byres said the regulator “is not declaring victory just yet”, when he announced the pending roll-back of 2014’s 10% cap on investor loans earlier this month.
“We believe that effectively a 3rd phase of macroprudential policy – resulting in a further tightening of lending standards – is now just underway,” UBS said.