Further lending curbs could lead to downturn

With more macroprudential limits on the cards, experts examine how added curbs would likely impact property prices

Further lending curbs could lead to downturn

Further macroprudential measures are likely to be introduced by APRA to cool housing credit growth, according to many market watchers. Both Judo Bank chief economist Warren Hogan and ANZ head of Australian economics David Plank told MPA they expected additional lending curbs to be introduced following the expected release of APRA’s framework towards the end of the year.

“There will be other tightenings of policy,” said Plank. “The RBA in its most recent financial stability review went through some of the options. They could raise the buffer further, but I think they’ll probably bring in a mix of DTI and LVR limits in some sort of combination.”

He said he believed APRA would try to do this in a way where first-home buyers weren’t impacted.

While Hogan believed the regulator would impose limits on the amount of leverage an individual borrower can take on, CoreLogic head of research Asia Pacific Tim Lawless told MPA he “would be surprised if they did further tighten their policy with a firm limit on high debt-to-income lending.”

“They did say in one of their statements that accompanied the latest policy change, that introducing firm controls on high DTI lending did have some complexities because it did involve looking at overall debt profiles across multiple loans and multiple lenders for a particular borrower,” he said. “Understandably, APRA probably implemented this current policy because it’s very straightforward to implement, it can be implemented fairly immediately, it’s fairly straight forward to monitor - but if they did move to a firm limit on DTIs that would have its own complexities.”

Limits on debt-to-income have been used before in the UK and in Ireland but are yet to be implemented in Australia, according to a report by the Sydney Morning Herald.

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In terms of the impact further macroprudential measures could have on the property market, Lawless said history was a good teacher.

“Any tightening of credit availability is a clear downside for the housing market,” he said. “I think the first policy that APRA has introduced isn’t material for houses. It’s a relatively light touch, it seems. But if we did see a further round of policy tightening, the impact on the housing market really depends on the magnitude of that tightening.

“If we do see a fairly strict control that limits credit availability or reduces borrowing capacity more substantially, I believe that would have a much bigger impact on the housing sector.

“We know through the previous rounds of macroprudential as well as the credit tightening regime that came about through the Royal Commission, the housing market did respond negatively. We saw housing values, particularly in Sydney and Melbourne where investment was the most concentrated, fall through 2015 in line with the first macroprudential rules; they fell mid to late 2017 all the way through to the middle of 2019 on the back of the interest only rules, amplified by the Royal Commission tightening.

“Chances are we would see demand being reduced through further credit tightening.”

Whether or not that reduced demand would translate to negative growth was another story, he said.

“I don’t think housing prices will start to trend lower until we start to see interest rates rising, but in saying that, if we did see a much more substantial credit tightening event take place then we’d have to change that view,” he said.

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Plank said one of the reasons the RBA hadn’t moved on the cash rate yet was because of the role that macroprudential policy would play in terms of cooling the property market.

“Before we get there (to a cash rate rise), we’re going to have more macroprudential policy,” he said. “In fact, one of the reasons why we don’t have the RBA going as early as some people do is we think macroprudential policy will deliver quite a slowdown in house prices over the course of next year and into 2023.”

Over the past year, Australian property values have surged more than 20%. While APRA increased the serviceability buffer two weeks ago, more than two dozen lenders have cut their variable rates over the last month, leading some to question whether the level of competition among financial institutions would negate the impact of the measure.