The RBA’s semi-annual Financial Stability Review (FSR) has just been released and contains a special section, or box as the RBA calls it, on “responses to risks in the housing and mortgage markets”.
The RBA outlines the key areas of surveillance and guidance APRA issued to Australia’s ADIs (authorised deposit taking institution) – the banks, building societies and credit unions. But it seems that Australia’s Council of Financial Regulators (CFR), which includes the RBA, APRA and ASIC might have missed the market here when it comes to reining in investors who are driving the current spurt in Sydney and Melbourne.
Here are the highlights:
- APRA supervisors will be alert to growth in an individual ADI’s investor housing loan portfolio that is materially above a benchmark of 10% per year. This benchmark was established by APRA after consultation with other members of the CFR, and takes into account a range of factors including household income growth and recent market trends.
- APRA has also specified that ADI’s loan serviceability assessments should include an interest rate buffer of at least 2 percentage points above the standard variable rate (less any discount that is applied for the whole term of the loan), with a floor assessment rate of at least 7 per cent. APRA noted that good practice would be to maintain a buffer and floor rate comfortably above these levels, rather than operate at the minimum expectation.
One implication is that when lending rates are low, such that the interest rate floor is higher than the lending rate plus the buffer, a borrower will not be able to take out a larger loan just because lending rates have fallen. The recommended buffer and floor rates are based on a number of considerations, including the size of past increases in lending rates in Australia and other jurisdictions, international benchmarks for serviceability buffers and long-run average lending rates in Australia.
- Supervisors will also be monitoring other elements of ADI’s serviceability assessments such as allowable income, minimum living expenses, and other debt commitments to ensure these are not relaxed and that prudent loan serviceability standards are maintained.
- APRA also stated that in the current environment it would consider enhanced supervisory action when ADIs undertake large volumes of lending in risky categories, or increase higher-risk lending as a proportion of total new lending. Higher-risk loans include those with high loan-to-valuation ratios, loans with high debt-servicing levels, loans to owner-occupiers with lengthy interest-only periods and loans with very long terms.
The most potent weapon there for owner-occupiers is the rule around serviceability at a 7% minimum rate. But that won’t stop investors using income from the investment property and a lower LVR from a combined mortgage with one or more existing properties to still outbid an owner-occupier. That’s especially the case when the tax shelter of negative gearing is included.
Likewise, the RBA says ASIC is investigating whether the high proportion of interest-only loans is in compliance with responsible lending obligations established under the National Consumer Credit Protection Act 2009. This Act requires lenders “to assess loan serviceability such that new borrowers do not overstretch themselves to purchase property or rely on expectations of future increases in housing prices to enable them to do so”.
Australia’s regulators are clearly worried about the run-up in house prices and the investment properties.
Elsewhere in the FSR the RBA says, “Ongoing strong speculative demand would tend to amplify the run-up in housing prices and increase the risk that prices in at least some regions might fall significantly later on.”
But, on the face of it except for the 10% annual growth rate cap in overall investment loans the measures outlined above seem aimed at owner occupiers rather than investors.
So for the moment the current status quo remains. Investors will continue to drive the market.