At the end of last week, the Reserve Bank offered a possible glimpse of the future for its housing market policy.
That future may be macroprudential policies and, judging from the comments by the bank’s governor Glenn Stevens, it will not be a New Zealand-style loan to property value cap, but a loan to income limit.
“The most effective tool could be that when banks test people for an interest rate, so you are supposed to be able to make the payments not just at the current rate but, say, 200 [basis] points higher, APRA could insist that the test be made 300 higher, or 400, or whatever, so that people do not get overcommitted,” he told the House of Representatives Economics Committee.
Banks already ‘stress test’ borrowers to see if they can afford to make repayments at higher interest rates – late last year Mike Smith said ANZ had lifted its test to 2.5 percentage points [250 basis points] above current mortgage rates, up from a 1.5 percentage point test previously.
The bank has done that in response to record low mortgage rates, with many standard variable discount rates around 5.2 per cent or lower.
At current rates, ANZ’s old buffer of 1.5 per cent would have been a safeguard only against interest rates returning to average levels (about 6.7 per cent since June 2004), and even its 2.5 per cent buffer will not protect it (or its borrowers) against rates returning to the most recent high of nearly 9 per cent, seen only five-and-a-half years ago.
So there is a strong financial stability argument for the Australian Prudential Regulation Authority (APRA) to start making banks put a 3 or 4 percentage point safety buffer on current rates when they test borrowers’ ability to meet repayments.
However, there is another, more immediately pressing, reason why so-called macroprudential policies (such as this larger interest rate buffer) may be introduced.
A Bank for International Settlements report shows that using larger safety buffers when testing borrowers’ ability to repay loans results in a fall in demand for credit, and slower lending growth usually translates to smaller home price gains.
Head off a housing bubble
While Mr Stevens told the committee on Friday that he was quite comfortable with housing loans growing at the current rate of 5-6 per cent, he also noted that he would be concerned if lending grew much faster.
He also expressed concern at the 8-9 per cent growth in loans to investors, saying “that’s probably fast enough”.
For the Reserve Bank, putting a bigger regulatory speed limit on lending means that interest rates could be either cut further, or maintained for longer at record low levels, to stimulate economic activity without further inflating Australia’s property prices.
“The benefit of that type approach is it allows lower interest rates to feed through into lower servicing costs for both new and existing borrowers, but it does not mean that lower interest rates keep on increasing the size of the loan that people can get access to,” the RBA’s deputy governor Philip Lowe told the committee.
“I think there is quite a lot of merit in exploring that. I know APRA is discussing that at various levels with the bank lenders.”
However, the bank and APRA are cautious of macroprudential policies because they can distort free markets.
One of Dr Lowe’s concerns is that fringe mortgage market players might find loopholes around any new loan limits, potentially shifting higher risk borrowers away from more conservative and closely watched large institutions towards riskier, less stable operators.
Such limits on lending, for instance, obviously increase incentives for fudging or outright fraud when loan applicants declare their incomes, offences that a few unscrupulous mortgage brokers have already been convicted of.
The other problem is that a tighter income test may not stop access to credit for wealthier buyers, particularly cashed up local and overseas buyers that may not be borrowing at all, as much as it does for first home buyers, thus making it even harder for this group which is already struggling to break into home ownership.
Mr Stevens observed that this has been one problem with New Zealand’s limit on how much banks can lend relative to the valuation of the property.
“If we were to have, say, a loan-to-value cap, who do you think will be most affected by that? It will be first-time buyers,” he told the MPs.
“I can imagine at the political level you will find that uncomfortable, should we proceed down that track.”
Story: Michael Janda Source: www.abc.net.au
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