Morgan Stanley thinks APRA’s housing intervention could suck billions out of the consumer economy

A quiet afternoon at Sydney’s Circular Quay. Photo: Saeed Khan / AFP / Getty

Despite the impression you might get from policy wrangling like we’ve seen in recent weeks over corporate tax rates, or complex arguments about the levels of growth that other policy adjustments can deliver, or the daily updates you’ll see on commodity prices, at the heart of the Australian economy there is one single force that is more important than any other.


People like you and me.

Our daily decisions to buy and sell things — the billions transactions we make every year — are by far the biggest component of economic activity. Look:

Source: JP Morgan

This broad bucket of “consumption” accounts for almost a trillion dollars of economic activity in Australia every year.

It’s why economists conduct expensive research on consumer confidence and why numbers like we’ve seen today, with the ANZ-Roy consumer confidence index slipping below its long-run average, are concerning.

If consumers enter a sustained period of uncertainty and feeling negative about the future, they’ll pull back their spending and the growth of this vast pool of economic activity will slow down.

There are tentative signs that a consumer retreat might be underway, for example in the negative growth in retail spending we saw in February. Car sales have also been looking a little weak.

The consumer confidence data out today shows a deterioration in how people are thinking about the future on a range of fronts, from the economic outlook to their own household finances. Here’s the chart showing people’s view on the medium-term economic outlook.

Source: ANZ


As David Scutt points out here, this is unusual given that surging properties like we’ve seen in the major cities would typically be linked with a “wealth effect”, whereby people feel better about their prospects because their house is worth more.

And this is where APRA, the banking regulator, comes in.

APRA last month introduced another range of measures to try and put the brakes on speculative activity in the housing market, chiefly by limiting the flow of new interest-only lending to 30% of new mortgage loans. The intervention has injected fresh vigour to the already intense national conversation about how expensive housing has become, particularly in the major cities.

This isn’t just about housing affordability. It comes after clear warnings from the RBA about risks to financial stability, noting last month that “recent data continued to suggest that there had been a build-up of risks associated with the housing market”.

It added that “borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income”. These comments are part of a pattern of a steadily increasing focus on financial stability under the RBA governorship of Phil Lowe.

Housing can get expensive but that’s a problem you can live with. The same can’t be said of serious financial stability risks, hence the policy intervention.

It’s possible that all this talk in recent weeks has provoked Australians to reassess their prospects and come to grips with the fact that the debt taken on in getting into the property market will need to be repaid.

Feed this back into the prime importance of household consumption continuing to grow in the overall domestic picture, and you have a concerning picture.

And there’s more to come. Morgan Stanley analysts say APRA’s intervention could directly strip billions of dollars out of household consumption as banks move to reprice mortgages and investor loans that were previously interest-only roll over into much more costly principle-and-interest repayments.

In a research note the bank’s Australian equity strategy team, led by Chris Nicol, offered this calculation (emphasis added):

While this looks to be a cautious further step by APRA, we note that it comes alongside a material repricing of investor mortgages and will potentially be followed by higher risk weights. The market may also underestimate the degree to which Australian mortgage payments ‘step-up’ when rolling from IO-phase to P&I (at least +30% and often +50-70%, depending on tenors and headline rate). At an aggregate level, we calculate that a 10ppt fall in the share of IO mortgages to the new cap would reduce household free cash flow by around A$3bn (0.26% of income), with the average 14bp of mortgage hikes over the past fortnight absorbing another A$2bn (0.15%). This increases the burden on a consumer seeing no income growth (average wages were -0.5% in 2016), and we again reiterate our caution on the growth outlook, while seeing the market as too hawkish on the prospect of RBA hikes over the next 18 months.

That’s $3 billion sucked out of other parts of the consumer economy on top of the $2 billion already chipped out of households’ disposable income thanks to mortgage price increases by the banks last month.

As the saying goes, a billion here, a billion there, and sooner or later it starts to add up to real money.

In an environment where the retail industry – the biggest employment sector in the country after healthcare – is looking weak and inflation is staying low partly because consumers aren’t spending as freely as perhaps they would be if they weren’t loaded up with debt – all of this adds up to another prospective drag on the consumer outlook which is so central to economic growth.