Lending restrictions by APRA are reshaping Australia's housing market, and there could be more to come

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Australia’s banking regulator, APRA, has released quarterly data which show a sharp decline in interest-only lending by Aussie banks.

It follows macro-prudential measures introduced by APRA in April to cool Australia’s major housing market, which capped interest-only lending to 30% of new loans issued.

As was the case in 2015, the implementation of macro-pru targeting investors is having a tangible impact on price appreciation in Australia’s larger housing markets.

The recent slowdown has been led by the Sydney market, with monthly price data by CoreLogic showing a 0.7% decline in November amid falling auction clearance rates.

With that in mind, the relative effectiveness of macro-prudential measures is likely to factor into the RBA’s decision-making on the outlook for interest rates.

And JP Morgan economist Tom Kennedy isn’t ruling out the prospect of further macro-pru down the track.

“While the RBA appears somewhat content with the impact of macro-prudential restrictions on the property market, the bank is cognizant that housing credit growth continues to outpace incomes growth, which in turn is driving the aggregate household debt-to-income ratio higher,” Kennedy said.

“We therefore remain mindful of the risk that the regulatory framework is tightened further, potentially via the implementation of borrower debt-to-income restrictions.”

Data for the three months to September clearly shows the lagged impact of APRA’s April restrictions.

The table below tells the story, with the number of new interest-only loans issued almost halving from the previous quarter:

Source: APRA

According to Kennedy, the data shows that lenders are going “above and beyond” in complying with the latest restrictions.

This chart shows the sharp decline in the flow of new interest-only loans, which are now well below the 30% threshold.

The latest figures are striking “not only on the quarterly flow, but also on the change in the stock of IO lending which also moved sharply lower”, Kennedy said.

So in addition to issuing fewer new interest-only loans, banks are also seeing a shift in behaviour among borrowers from interest-only loans into principal & interest repayments.

Kennedy added that APRA’s April ruling followed previous macroprudential measures in 2015 which capped growth in investor loans at 10% per annum.

And in the wake of the April 2017 restrictions, monthly credit data from the RBA showed that investor lending has again started to decline, following a sharp fall two years earlier:

Amid the recent signs of cooling in Australia’s housing market, policy makers will also be tasked with offsetting the threats to domestic consumption stemming from high household debt and low wage growth.

This morning’s GDP data did nothing to quell fears of a consumption crunch, with quarterly growth missing estimates due largely to ongoing weakness in household spending.

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