This article is from the Australian Property Journal archive
THE latest additional supervisory measures announced by the Australian Prudential Regulation Authority may hit housing demand, according to economists.
APRA has announced additional macro-prudential policy tightening, including limiting the flow of new interest-only lending to 30% of total new residential mortgage lending, and within that place strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80%.
At the same time, APRA has called for stronger scrutiny and justification of any instances of interest-only lending at an LVR above 90%.
The macro-prudential moves have been welcomed by the property industry.
“The API continues to support measures by APRA which provide rigour to the Australian financial system,” the Australian Property Institute’s CEO Mike Zissler said.
“Australia’s residential housing market is not homogenous and so these supervisory steps provide a suitably cautious approach,” Zissler added.
APRA also told the banks to manage lending to investors so that it comfortably remains below the previously advised benchmark of 10% growth.
This is in response to recent housing finance data which shows investment lending has risen to 9% – getting closer to APRA’s 10% mark, prompting the major banks to raise interest rates for residential property investors in the past fortnight.
UBS economist George Tharenou and Scott Haslem said the most binding constraint was a new cap on the flow of interest-only (IO) home loans to only a 30% share, which is well below the decade average share of 40%.
“This is likely partly indirectly aimed at investors where IO has been a very high ~60%+ share for many years; albeit owner-occupiers have also lifted to a significant ~23% share.
“Looking forward, we expect home loans to slow in coming months, after Jan-17 hit a >2-year high of 16% y/y – as investors surged 27% y/y. While this will slow housing credit growth moderately (now 6.4% y/y; owner-occupier 6.2%, investor 6.7%), investors at 9% annualised in the last few months will have to retrace. This assumes investors will bear the brunt of the adjustment,” they said.
“For instance, under a scenario where there is no change to 1) the ~50-50 split of total home loans between investors & owner-occupiers.
“2) the 23% share of owner-occupiers on IO; to meet the new 30% IO system cap, the share of investor loans on IO would ~halve from ~60% now to ~37% (or the share of owner-occupier on IO can also fall).
“This policy change will probably (indirectly) crimp household cashflow, as lenders continue to re-price IO loans, and some borrowers switch to principal & interest repayments.
“Overall, we flagged further macro-prudential tightening as the RBA’s first response to strong house prices, rather than hiking rates. While these changes are less constraining than lowering the 10% cap to 7% (as we expected), we believe this could have a meaningful impact on demand (and price growth) over time, supporting our slowing housing outlook and our RBA on hold view (until at least mid-18),” they said.
Ratings agency Fitch said the tighter macro-prudential would have a bigger impact on owner-occupiers than investors.
Fitch said whilst changes should rein in growth in some riskier types of mortgage lending and support the resilience of banks’ asset quality to a potential downturn in housing market conditions, the measures do not go as far as it had expected.
Financial institutions senior director Tim Roche said house price growth could still remain high and some risks may continue to build, which might lead the regulator to tighten restrictions again later in the year.
Meanwhile Roche said the tighter limits on interest-only mortgages with higher loan-to-valuation ratios (LVR), will likely to have a bigger impact on lending to owner-occupiers than on investors.
“Owner-occupiers account for most loans with high LVRs, and we have previously pointed to the risks associated with interest-only lending to owner-occupiers.
“Investors can deduct interest payments from tax, which provides an incentive for these borrowers to maximise their loan amount.
“Owner-occupiers do not receive the same benefit, which means that they are more likely to be driven toward interest-only loans by financial constraints. Moreover, household finances are currently coming under pressure from low wage growth,” he observed.
“Australian banks had already started to raise lending rates, primarily on investor and interest-only mortgages, and the new rules should encourage more price differentiation between mortgage types. Lending rates for interest-only mortgages, particularly those with high LVRs, are likely to rise further.
“The mention in APRA’s communication of its increased scrutiny of warehouse lending suggests it has some concerns about mortgage lending shifting from banks to the non-bank sector to avoid the stricter underwriting standards. Many non-bank lenders use warehouse funding from banks to cover their mortgage lending until they develop a large enough pool of loans to support an external securitisation.” Roche concluded.
Australian Property Journal