Faced with booming housing prices, high and rising household indebtedness, subdued household income growth, historically low interest rates, and strong competitive pressures among lenders, Australia’s banking regulator, APRA, introduced tighter lending standards for home loan lending earlier today.
“Given this environment, APRA has concluded that further steps to address risks that continue to build within the mortgage lending market are appropriate,” the regulator said in a statement released earlier today.
While it refrained from lowering the annual lending cap on housing investor credit from its current level of 10%, something many believed was the most likely policy response given the success it had in cooling investor lending growth when introduced in late 2014, the main change introduced today was to limit new interest-only lending to 30% of total new residential mortgage lending, with particular focus on loans with high loan-to-valuation ratios.
“APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile,” it said, noting that the measures introduced today should “reinforce sound residential mortgage lending practices in an environment of heightened risks”.
While limiting interest-only loans to 30% of new mortgage lending should help to slow credit growth to housing investors, the question many are now asking is will it actually help to reduce financial stability risks, something that both APRA and the RBA suggest have increased.
If the emails that have hit out inbox in the wake of the APRA announcement are anything to go by, economists, by and large, think that APRA could have done more if it wanted to.
And some believe that it will do little at all, likening the new measures to being hit with a wet lettuce leaf.
Here’s just a few of the comments that have been offered in relation to today’s changes.
Annette Beacher, TD Securities
Australia’s prudential regular today announced one new macroprudential tool, and threatened the banks with a lot of “monitoring”, “scrutinising” and “observing”. The only new hard limit is capping interest-only loans to 30% of new loans (currently 40%), but doesn’t differentiate between investor and owner-occupier.
With more talk than limits on riskier lending practices, APRA is leaving it up to the banks to manage their own risks.
These new “measures” are little more than a jawboning exercise and will barely scratch the surface of the relentless appetite for housing as one of few tax-effective assets suitable for retirement.
Michael Turner, RBC
We see the measures as erring to the softer end of expectations. There was no adjustment to the 10% speed limit on investor loan books and the limit on interest-only loans is not significantly below their current share and there is no hard cap on high-LVR lending. Relative to the earlier measures, we doubt that the impact will be as large, although it is still reasonable to expect some slowing in investor activity through 2017 given declining rental yields, increasing mortgaging rates, and oncoming supply.
As a reminder, interest expenses on investor loans are tax deductible, whereas interest expenses on owner-occupier loans are not. Investors consequently tend to account for a high share of interest-only loans, and this is what the new regulation will mainly impact.
For the RBA, we will have their full appraisal of the housing market including their thoughts on these measures in their semi-annual financial stability review due April 13. Their effects will take longer to judge, and it will not be until late Q3 before regulators will feel comfortable making assessments on their impact.
Sally Auld, JP Morgan
There is a clear compromise here between ameliorating financial stability concerns while trying not to exacerbate economic tail risks arising from a sharp correction in the high density market induced by aggressive restrictions on the supply of credit.
One way to think about these developments is that APRA is trying not to restrict the overall supply of housing-related credit too aggressively, but rather, trying to improve the quality. However, the new restrictions do imply that credit growth will slow, especially in the investor segment. Beyond this, the extent of slowing in credit growth will depend on whether loan applicants simply switch products from interest only to principal and interest mortgages. It is also likely that some relative repricing of mortgage products will facilitate a shift in demand away from interest only.
While it will take 3-6 months for regulators to get a sense of whether new rules are working, there is clearly an intention to do more if necessary.
Shane Oliver, AMP Capital
That APRA moved again was no surprise, but the main surprise was that the investor lending speed limit remains at 10% rather than being cut to a more reasonable 5-7%. Limiting interest only lending may have the same effect as cutting the speed limit because around 60% or more of investor loans are interest only, but time will tell so further action may be required.
Putting that uncertainty aside though, the latest moves by APRA, coming on the back of bank mortgage rate hikes over the last two weeks, the likelihood of action to boost affordability in the May budget (including a cut to the capital gains tax discount), the surge in unit supply at a time of silly prices are all likely to result in a slowdown in property price gains in Sydney and Melbourne this year ahead of a 5-10% price fall starting next year some time.
In the short term all eyes will be on Saturday’s auction clearance rates to see whether there is much headline impact from APRA’s moves!
Bill Evans, Westpac
This is not a hard change to the target as had been mooted recently in the press, but it does suggest lending to investors will continue to grow at a pace meaningfully below 10%. Looking ahead, the next RBA Stability Review released on April 13 may provide more clarity on the macro prudential policy outlook and potential triggers for further action. For the time being though, the 2015 experience offers an understanding of the potential impact of this further tightening.
By year’s end, the RBA’s concerns with “a build-up of risks associated with the housing market” are likely to have eased.
David Plank, ANZ
Our initial impression is that the new steps may be less than anticipated. In particular, while there was some discussion that the ‘speed limit’ for investor loan growth might be reduced it has been left at 10%.
Our overall assessment is that the changes represent some tightening in standards, but not a dramatic shift. Hence we don’t see it as a game changer in terms of our thinking about the RBA outlook.
George Tharenou, UBS
We flagged further macroprudential tightening as the RBA’s first response to strong house prices, rather than hiking rates. While these changes are less constraining than lowering the 10% cap to 7% as we expected, we believe this could have a meaningful impact on demand –and price growth — over time, supporting our slowing housing outlook and our RBA on hold view until at least mid-2018.
Tapas Strickland, NAB
While some in the market may see APRA’s policies as a green light to further RBA rate cuts, NAB is still of the view that there is a very high bar to further easing.
The RBA remains sceptical about the effectiveness of such measures. This was again reinforced by RBA Assistant Governor Luci Ellis in a recent RBA research paper: “We are confident that such steps [macro-prudential] will work in the short to medium term. It is unclear if tighter prudential regulation can permanently offset lower rates in the long term”. And “given the potential financial stability consequences of low interest rates, it is important to ensure that interest rates are low only when the economy genuinely needs them to be low”. While the RBA holds these views, rates will likely be on hold.
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