"APRA's objective is to ensure the financial system remains safe"
The Australian Prudential Regulation Authority (APRA) has published its opening statement from Renée Roberts, executive director for policy and advice division, to the Standing Committee on Tax and Revenue. It addresses the APRA’s latest move to increase the serviceability buffer.
Last month, APRA instructed banks to assess new borrowers’ repayment capacity, with lending rates at least three percentage points higher than the prevailing interest rate — up from its previous 2.5%. The move comes after house prices spiked 20% over the past year, marking the fastest growth rate since 1989.
Warren Hogan, chief economist at Judo Bank, said this increased buffer is considered as a “warning shot” that could be followed by additional macroprudential measures in the first half of 2022.
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In his speech, Roberts reassured lenders and borrowers alike that although the current requirements can influence the terms, amount and price at which banks extend housing finance, it will not target matters of affordability.
“APRA seeks to ensure that banks are making sound credit decisions that are appropriate, individually and in aggregate, in the context of broader housing market and economic trends,” Roberts said.
However, the change will only make it more challenging for over-committed borrowers to obtain a loan. John Manciameli of Hunterwood Solutions said the measures only represent a 5% reduction in borrowing power, which has minimal impact on a typical borrower.
“We all have to remember that for 4 out of 5 borrowers, these changes won’t affect them,” Manciameli said. “We’re looking at the margins of things. It’s those people in Sydney and Melbourne on average incomes that were buying the $1.3 million property for the first time – it’s really going to affect them.”
Analysts also warned of a price war between lenders as they compete for market share by slashing variable interest rates for new home loan customers. Meanwhile, those who trend toward the lower variable could soften the impact of APRA’s approach.
Manciameli believes that house prices won’t decline until interest rates go up as he expects the banks to move independently ahead of a change in cash rate.
Still, APRA stood by its approach.
“APRA’s objective is to ensure the financial system remains safe, with banks lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” Roberts said. “We expect the overall impact on aggregate housing credit growth flowing from this change to be fairly modest, since many borrowers do not borrow at their maximum capacity.”