Credit squeeze coming this year or early next: CBA and ANZ

author-avatar By on October 01, 2021
Credit squeeze coming this year or early next: CBA and ANZ

On Friday ANZ and CommBank released reports forecasting when and how regulators will tighten credit criteria, also known as macroprudential policy.

The latest data from the Australian Prudential Regulation Authority (APRA), shows about 22% of housing loans originated with a debt-to-income ratio greater than six times through the June quarter. 

Additionally, RBA data shows annual housing credit growth rose to 6.2% in August, after regulators gave their best indication a credit squeeze is coming.

This has been supported by both CBA and ANZ, forecasting macro prudential policy could be introduced as early as this year. 

"The reintroduction of macro prudential policy looks likely in late 2021 or early 2022.Tighter policies around testing loan serviceability will see lending and dwelling prices slow," CBA economists said.

ANZ economists echoed similar.

"The way has been cleared for a tightening in macro-prudential policy, by late this year or early next. We think the initial steps by the regulators will be quite careful, aimed at slowing credit growth without triggering a sharp slowdown in the housing market. That calibration will be tricky," they said.

ANZ economists also stated the Financial Stability Review on 8 October could offer some clarity on the issue.

In early September Westpac CEO Peter King responded to APRA's debt-to-income data by saying that housing affordability had become "stretched" and that "Australia may need macro prudential policies." 

The Reserve Bank's Michele Bullock said last week that a number of measures are under consideration.

These included increasing the interest rate buffer used in serviceability assessments, which is currently at +2.5%, restrictions on the share of high debt-to-incomes loans, and restrictions on high loan-to-valuation (LVR) mortgages.

ANZ Senior Economist Felicity Emmett said that the first two options are more likely than the third, as restricting high LVR loans is likely to hit first-home buyers hardest.

"We anticipate regulators will go lightly in the first instance," Ms Emmett said.

"Their aim would be to slow credit growth to a level closer to income growth, which averaged close to 4% in the decade prior to the pandemic."

CBA economists also reported that the objective of these new policies would be to slow the amount of high debt-to-income loans.

"Based on recent communication out of the RBA, Council of Regulators and the Commonwealth Treasurer, it appears that the objective of macro-prudential policy this time around will be to slow the amount of new lending at high debt to income ratios," they said.

"That is most 'cleanly' achieved by either reinstating a uniform minimum interest rate to assess loan serviceability or upwardly revising the minimum interest rate buffer from 2.5% over the loan's interest rate.:

Earlier this week Gratton Institute offered an alternative solution, with a new report identifying house price inflation could be slowed by an increase in new builds. 

Ex-RBA economist Peter Tulip and REA economist Cameron Kusher also said regulators could more effectively address housing and financial stability by targeting banks' capital buffers, rather than hitting borrowers themselves.


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Image by Chandler Crittenden via Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
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  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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Aaron joined Savings.com.au in 2021. He is a finance journalist with a keen interest in property, the share market, and improving financial literacy in young Australians.

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