APRA’s latest attempt to slow investor activity in Australia’s housing market looks like it was already having an effect, even before they were formerly introduced in late March.
The value of lending to housing investors fell heavily in February, dropping close to 6%, the largest decline since September 2015, according to figures released by the Australian Bureau of Statistic (ABS) today.
Now, like then, the latest bout of weakness appears to have been prompted by measures introduced by APRA to limit interest-only mortgage lending — that traditionally favoured by investors — to 30% of total new mortgage lending from Australian authorised deposit-taking institutions (ADIs).
However, even with the sharp drop in new in lending to investors in February — coming one month before APRA introduced this measure — it still left the proportion of new lending issued to investors at 39.3%, a level unlikely to be welcomed by the regulator.
To Tom Kennedy, an economist at JP Morgan, the pullback one month ahead of APRA’s announcement suggests not only that the limitations on lenders were already “somewhat binding”, but may also signal the start of a more protracted slowdown in investor finance in the period ahead.
“These numbers obviously pre-date the macro-prudential tightening announced a couple of weeks ago, which have been beefed up to target interest-only lending, and also further lowering the investor mortgage credit growth speed limit,” says Kennedy.
“Given that lending leads credit, and with much wider amplitudes, just to maintain compliance with the pre-existing rules investor lending has been due a substantial pull-back.”
While these are only one months figures, and merely reverse a significant increase in investor lending beforehand, Kennedy says that this is likely to be the start of a trend, rather than a one-off, and will almost certainly lead to a moderation in house price growth.
“Given the extent to which housing transaction volumes have been tethered to investor lending flows, further contractions in the latter should take some of the oxygen out of housing activity,” he says.
“As such, we retain the view that investor loan growth will move materially lower in the coming months as the full effect of enhanced macro-prudential becomes increasingly evident.”
And Kennedy is not alone in that view.
George Tharenou, an economist at UBS, says that APRA’s move to limit interest-only lending will likely lead to a slowdown in housing market activity as well.
“This policy change, combined with the coincident out-of cycle mortgage rate re-pricing, may hit housing demand ahead and see slower home loan lending, credit growth and house price growth,” he said following the release of today’s report.
While Tharenou believes that conditions will slow, he doesn’t believe that it will cause anything more sinister that a correction in housing market activity, rather than a collapse.
“In terms of the housing outlook, we argue that a ‘people boom’ is supporting demand and should soften any downturn,” he says, referencing a strengthening in both population growth and short-term visitor arrivals to Australia over the past year.
Kristina Clifton, economist at the Commonwealth Bank, is another who says a slowdown in activity is likely to be seen in the months ahead.
“Strongly rising house prices in several of the capital cities means that there should still be plenty of positive momentum in new lending for the next few months of data,” she says.
“However from April onwards we may see a slowing in lending, particularly for investors, as the new APRA rules start to bite.
“In addition, the major lenders have all increased interest rates, particularly for investors and those with interest only loans, which should also act to cool the market a little.”
While many expect that APRA’s move, in conjunction with out-of-cycle rate increases, will succeed in slowing housing market activity, using untried macroprudential measures to reduce financial stability concerns arising from increased household leverage is not without its own risks, particularly at present.
That’s something that Bill Evans, chief economist at Westpac, touched upon in a research note released late last week.
“This process of macroprudential tightening care will need to be taken if the authorities want to avoid an unnecessarily sharp downside response in the market,” he says.
“While recent developments in housing markets are being assessed as ‘unhelpful’ by the authorities due to the lift in household leverage, the risk of a damaging fall in prices in response to a heavy handed approach must be a consideration for the regulators.
“Such a reaction could prove to be much more damaging for the overall economy than the current lift in household leverage,” he adds.
With labour market conditions and inflationary pressures so soft, the wealth effect from higher house prices has been one of the few positives helping to support household consumption in recent years, helping to offset weak household incomes growth as a result of record-low wage growth and elevated levels of labour market slack.
Should houses prices start to fall in response to APRA’s restrictions, and with the RBA not in a position to stimulate demand given interest rates are already so low, that would leave the largest component within the Australian economy in a precarious position.
That, in turn, would almost certainly prove detrimental on the broader Australian economy, making the task of boosting inflationary pressures and GDP growth, and reducing unemployment, all the more harder for policymakers.
It’s a delicate balancing act, but as we’ve already seen, there’s already been a noticeable impact from tighter lending restrictions in the February housing finance data.
Should it succeed in slowing housing market activity too much, it could easily see risks over household indebtedness spill over into the broader Australian economy.