Australia’s financial regulators are getting ready to re-enter the lending market, with tougher restrictions on new loans likely to be unveiled within weeks.
The Council of Financial Regulators (CFR), encompassing the Reserve Bank of Australia (RBA), APRA, ASIC and Treasury, confirmed it was discussing “possible” policy responses on Wednesday.
“The Council is mindful that a period of credit growth materially outpacing growth in household income would add to the medium-term risks facing the economy, notwithstanding that lending standards remain sound,” it said in its Quarterly Statement.
The country’s chief financial watchdogs said they would detail their plan “over the next couple of months”, although they are expected to target loan sizes.
On Tuesday, Treasurer Josh Frydenberg signalled their intent to restrict new borrowing as household debt continues to balloon.
Property prices are expected to finish the year 20% higher than they started it, as record-low interest rates have lowered borrowing costs and income support has lined Australian pockets.
“The recent lockdowns have reduced transactions and new listings, but prices are still rising briskly in most markets,” the CFR said. “Commitments for new housing loans remain at a high level, suggesting that credit growth is likely to remain relatively strong.”
Specifically, regulators are expected to implement debt-to-income limits, preventing new borrowers from being approved for loans six times greater than their annual wage. Right now around 22% of all home loans exceed that limit.
With the Treasurer having lauded the fact that the current boom has been driven by home buyers, the CFR will be challenged to target investors.
While debt-to-income ratios will primarily restrict the cohort, which has come streaming back into the market in recent months, so too will some homebuyers be caught up by them.
Home buyers to be priced out
In Australia’s most expensive markets, namely Sydney and Melbourne, decreased borrowing power is destined to freeze out some buyers, particularly the young.
Consider the fact that the median wage in Australia is around $60,000. Even as a couple, Sydneysiders on that kind of money are going to struggle to buy so much as a unit in the Harbour City, with median prices requiring an $825,000 outlay.
Such is the market that the limit means that even a single buyer making $100,000 per year is going to be priced out unless they can tip in a deposit larger than 20%.
With prices a little more modest in Melbourne, buyers are slightly better off. A couple might still be able to buy an apartment with a $615,000 price tag, even with the proposed limit.
But all of the examples – be it a couple on median wages or a single home buyer on low six-figures – would only be able to dream of buying a house in either city.
Nationally, the average dwelling now costs more than $750,000 across all state capitals. For houses, that rises to $826,000.
Simply put, even earning the higher average wage of $82,000, no single worker would get a look in.
Specifically, younger buyers may feel the brunt of the changes. Starting from a lower salary base, most will need to wait years before reaching the kind of income deemed adequate to service a home loan in their particular city.
The problem is prices
For that reason, it’s interesting that regulators appear to be honing in on debt ratios, particularly as banks begin to do their own tightening.
Rather than implement strict debt-to-income restrictions, the Commonwealth Bank (CBA) has already begun fattening its own lending buffer to ensure approved borrowers have some breathing space for things like interest rate hikes.
ANZ boss Shayne Elliott meanwhile told policymakers last week that his bank, the third largest in the country, was increasingly turning applicants away, forfeiting market share in the face of rising risks.
It’s clear, however, that regulators aren’t comfortable letting lenders make that decision themselves, with a view to implementing a standardised measure as credit continues to grow.
Yet, as the examples above suggest, the problem naturally is the fact that property values are so high to begin with, and the reality that prices growth has outstripped wages for so long.
It demonstrates just how much years of government initiatives have really shifted the dial, with economists pointing out that most affordability policies actually make things worse.
While the RBA has its focus on kickstarting wage growth again, it will take time to achieve its objective – if it ever does.
But the problem of housing affordability is ultimately structural. No number of lending restrictions is going to fix that.