RBA, APRA signal crackdown on lending to cool housing market

author-avatar By on September 29, 2021
RBA, APRA signal crackdown on lending to cool housing market

On Wednesday the Council of Financial Regulators released a joint statement highlighting potential changes to macroprudential policies.

UPDATE: APRA announced it will increase the mortgage serviceability buffer from 2.5% to 3.0%.

The Council of Financial Regulators' (CFR) - which includes the RBA, APRA, ASIC and the Australian Treasury - joint statement said despite lockdowns hampering transactions, property prices are "still rising briskly".

"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," the statement said.

This follows recent ABS data which showed average wealth per capita exceeded $520,000 off the back of strong home price growth, though debt per capita rose to $102,000, and around $130,000 when excluding minors.

While the RBA's remit isn't to specifically address housing affordability, its key role is to maintain Australia's financial stability, which could be affected by runaway housing prices.

"Over the next couple of months, APRA also plans to publish an information paper on its framework for implementing macroprudential policy," the statement said.

Such policies tabled include a clamp down on debt to income (DTI) levels. The latest data shows more than one fifth of all new loans written were for home buyers borrowing more than six-times their income.

However, former RBA economist and current chief economist at the Centre for Independent Studies, Peter Tulip, said addressing DTI has no economic rationale.

"The interest burden on many properties is now less than the rent. But APRA is about to tell borrowers that they cannot afford the loan," Mr Tulip told Savings.com.au.

"This restricts home ownership to those with the wealth to have substantial equity in their home. It is unfair and inefficient, for no obvious prudential gain."

"At record low interest rates, sensible asset-to-income and hence debt-to-income ratios are much higher than in the past."

Accessibility vs Affordability

The argument against clamping down on DTI ratios highlights that it will affect home buyers' accessibility to get a mortgage, rather than actually addressing housing affordability.

"The main public concern with rising house prices is that housing is becoming unaffordable, in particular for young families that have difficulty saving a deposit," Mr Tulip said.

"Lending restrictions like DTI limits will make it even harder to get a loan – especially for those with little savings."

REA Group economist Cameron Kusher, writing for the Australian Business Review, said a clampdown on DTI would be "counterproductive" for owner occupiers.

"Although people may be taking out mortgages on marginally higher DTI ratios than those in the past, this is a function of the lowest mortgage rates on record leading to the ratio of housing interest repayments to household income sitting at its lowest share since 1999," Mr Kusher said.

Recent Government stimulus policies designed to get Australians into the housing market include HomeBuilder, the First Home Loan Deposit Scheme, and the Family Home Guarantee.

"Given improving home ownership rates is the goal of these government schemes, it seems counterproductive to limit first-home buyers by reducing their ability to borrow," Mr Kusher said.

Propertyology property analyst Simon Pressley was blunt in his assessment of potential APRA crackdowns.

"Their [APRA's] track record for considering big-picture consequences is not good," Mr Pressley said earlier in September.

"One can only hope that the APRA Board does not wish to leave a legacy as economic destroyers and dream-breakers."

See Also: Which generation had it harder for home buying? Baby Boomers vs Gen X vs Millennials

So, what's the solution then?

Much of the boost in lending over the past year has been through owner occupiers, though investors are slowly coming back into the market after APRA clamped down on investment lending between 2014 and 2018.

Speaking to the Australian Financial Review on Tuesday, Treasurer Josh Frydenberg toed the CFR's stance.

"We must be mindful of the balance between credit and income growth to prevent the build-up of future risks in the financial system," Mr Frydenberg said.

"Carefully targeted and timely adjustments are sometimes necessary.

"A positive feature of this housing cycle compared to that of the last is a higher proportion of first home buyers and owner occupiers entering the market."

Mr Tulip proposed another lever the regulators can pull to address housing accessibility and affordability - one that puts the onus of financial stability onto banks and not borrowers.

"We have a policy – the Countercyclical Capital Buffer (CCyB) - that is explicitly designed to address that problem," he said.

"A direct and efficient way to avoid bank failures is to increase bank equity. Make sure banks have a sufficient buffer to handle any losses.

"It is based on substantial research that finds that increasing bank equity is both effective in reducing bank failures and relatively low cost."

Mr Kusher recommended "more subtle" ways to cool the market, including lifting mortgage serviceability assessment floors.

In June CommBank did exactly that - it lifted its serviceability buffer from 5.1% to 5.25%. 

Rising debt to income levels also has the heads of the major banks concerned, with CBA chief Matt Comyn saying last week the bank was "increasingly concerned".

ANZ chief Shayne Elliott said there are "some emerging signs of stress", while Westpac chief Peter King has previously said affordability at the moment is "pretty stretched". 

Did it work in New Zealand?

New Zealand has so far experienced much stronger home price growth than Australia, and its Reserve Bank (RBNZ) has introduced various restrictions on loan-to-value ratios, particularly for investors.

Such restrictions include: 

  • Restricting 80%+ LVR loans to owner occupiers to 10% of new loans (from 1 November)
  • Restricting 60%+ LVR loans to investors to 5% of new loans.

This means the majority of owner occupiers need a 20% deposit, and the majority of investors need a 40% deposit, dubbed the so called '20/10' and '40/5' rules.

For owner occupiers, the rule was set to be tightened from '20/20' on 1 October but was pushed back to 1 November due to ongoing Covid economic challenges.

LVR requirements were scrapped at the onset of the Covid pandemic in 2020, but were re-instated in March.

Various industry pundits in New Zealand also said the rules essentially pulled forward demand for lending prior to the new restrictions taking place.

CoreLogic NZ's figures from January show 30% of all lending went to investors - a 15-year high.


Advertisement

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval
VariableMore details
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
VariableMore details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
VariableMore details
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
VariableMore details
YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • For a chance to win $100K towards your home loan, apply with Athena before Oct 31 & be approved by Dec 15
  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • For a chance to win $100K towards your home loan, apply with Athena before Oct 31 & be approved by Dec 15
  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
VariableMore details
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^

Rates correct as of October 23, 2021. View disclaimer.


Photo by Jesse Collins on 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.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • 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.

Latest Articles

author-avatar
Harrison is Savings.com.au's Assistant Editor. Prior to joining Savings in January 2020, he worked for some of Australia's largest comparison sites and media organisations. With a keen interest in the economy, housing policy, and personal finance, Harrison is passionate about breaking down complex financial topics for the everyday consumer.

Be Savings smart.
Subscribe for free money newsletters.

By subscribing you agree to the Savings Privacy Policy