• 04/08/2021

APRA’s daunting double challenge

Karen Maley| Australian Financial Review| 21 April 2021

APRA’s daunting double challenge (afr.com)

Wayne Byres, the boss of the country’s prudential regulator, might like to insist that it’s not his job to solve the problem of soaring house prices, but astute bankers have a different view.

They believe it’s likely to be only a matter of time before the Australian Prudential Regulation Authority finds itself under pressure to work out a way to cool the boom in house prices, which has been fuelled by ultra-low interest rates.

As National Australia Bank chairman Phil Chronican noted on Monday, lending restrictions, known as macroprudential controls, would be “a rational response to the current environment”.

So the big question in banking circles is what sort of rules is APRA likely to introduce to put the brakes on the property market.

And that’s where it gets tricky. Because unlike the last housing boom when investors were piling into the Sydney and Melbourne markets and pushing prices higher, the current house price surge is being driven by owner-occupiers.

What’s more, an encouraging feature of this housing boom is that first home buyers have been out in force.

That means the macroprudential policies that APRA introduced in 2017 – and which involved putting restrictions on bank lending to investors, and interest-only home loans – aren’t suitable this time around.

In addition, APRA will be very anxious that any credit curbs on lending it comes up with this time do not provide an opportunity for the banks to profiteer.

More careful and nuanced

In 2018, an investigation by the Australian Competition and Consumer Commission found that the big four banks took advantage of the macroprudential policies to lift rates on interest-only loans and extract an extra $1.1 billion in profit from customers.

And that’s why senior bankers expect APRA will be more careful and nuanced when it comes to tailoring its macroprudential policies to curb the frenzied rise in house prices.

Indeed, some bankers believe APRA will shy away from setting definite caps on, for example, how much debt home borrowers should be allowed to take on compared to their income, or the size of their home loan in relation to the property price (loan to valuation ration, or LVR).

Instead, they believe the prudential regulator will conduct an in-depth review of the home-lending policies of individual banks, paying particular interest when it comes to debt-to-income levels and the verification of borrowers’ expenses.

In response to this increased scrutiny from APRA, banks would probably tighten their lending criteria, which would help take some heat out of the frothy property market.

Overt lending restrictions

However, other bankers believe that activity in the housing market is now so frantic that APRA will have little choice but to implement more overt lending restrictions.

They believe the most likely outcome is that APRA will try to cool the market down by imposing a cap on the share of loans with an LVR of more than 90 per cent as a proportion of their new lending.

But they point out that adopting this approach could create further difficulties for the prudential regulator.

Since the middle of last year, the share of owner-occupier home loans where the mortgage is more than 90 per cent of the property’s value has been steadily nudging higher.

About 14 per cent of all owner-occupier home loans now have an LVR of more than 90 per cent, compared with around 10 per cent four years ago.

Part of this increase in high LVR lending reflects the rising number of first home buyers, who have been lured into the housing market by the combination of cheap interest rates and generous government incentives.

And first home buyers typically have lower deposits than people who have owned properties previously.

This leaves APRA with the daunting double challenge of reining in home lending, without crimping the supply of credit to first home buyers.

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