The banking regulator Australian Prudential Regulation Authority (APRA) has finally pulled the trigger on the growing financial risks of soaring house prices, forcing banks to reduce their loan amounts.
With record interest rates continuing to rapidly inflate house prices, APRA’s action will force banks to test whether new customers can handle their repayments at an interest rate 3% higher than the average. real rate of the loan.
That is compared to a 2.5% cushion at the moment, which means that the âfairly modestâ change will reduce the borrowing capacity of many borrowers by about 5%.
So a client who was approved for a loan of $ 800,000 under the old rules could face a loan of $ 760,000 under the new rule.
Real estate debt is growing faster than income
APRA President Wayne Byres said the move was a response to real estate debt growing faster than household income, which has prompted more clients to borrow more than six times their income, which which is considered a riskier loan.
“By taking action, APRA is working to ensure that the financial system remains secure and that banks lend to borrowers who can afford the level of debt they take on, both now and in the future. ‘future,’ Mr. Byres said.
âWhile the banking system is well capitalized and lending standards have been broadly maintained, the increase in the share of heavily indebted borrowers and indebtedness in the household sector in general means that medium-term risks for the financial stability accumulate. “
APRA said the change would likely have a bigger effect on real estate investors, who typically have lower deposits and larger loans.
Ink was barely dry on the changes before property analysts said further restrictions would be needed to curb soaring prices given the current pressure in the market.
The number of properties on the market is low
The crackdown on home loans comes as the number of available properties has been quite low due to COVID-19 lockdowns – low supply and high demand being a textbook economic recipe for rising prices.
This scenario played out perfectly in last week’s CoreLogic figures, which showed house prices had risen by more than 20% in the past year, making it the biggest annual boom since 1989.
This is an unusual boom with regional areas growing faster than cities, with prices rising 1.7% in September and 23.1% over last year, compared to 1.5% and 19.5% gains for the capitals over these respective periods.
Does the boom stabilize?
There are also signs that the boom is leveling off, with the record national monthly growth rate of 2.8% in March falling to 1.5% last month.
The certainty of a federal election in the near future, with no government of the day likely to want to cut paper profits for millions of Australian voting homeowners, adds another wrinkle to the mix.
So the question becomes how severe the ongoing crackdown on lending standards will have to be, and whether it will have much of an effect on house prices in Melbourne and Sydney, which have literally increased by the hundreds and thousands. dollars per day.
APRA’s changes may just be the start
APRA’s action follows a wide range of concerns voiced by the heads of some of the major banks, the Organization for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF) and the Reserve Bank Australia (RBA), who have all warned that the price spike could lead to financial instability.
It follows the regular quarterly meeting of the Board of Financial Regulators – made up of the RBA, the Australian Securities and Investments Commission (ASIC), APRA and the Federal Treasury.
Treasurer joins regulators
The last meeting noted that house prices were rising âsharplyâ and could pose risks to the economy.
“The council recognizes that a period of credit growth significantly exceeding household income growth would increase the medium-term risks facing the economy, even if lending standards remain sound,” the council said.
Interestingly, Treasurer Josh Frydenberg attended this meeting and also expressed concern about a possible overheating in the housing market.
Other macroprudential measures that APRA might need to consider if this change is not enough include placing limits on particular types of loans – such as the successful reduction of interest-bearing loans only to deter investors – or a tightening income / loan ratio or loan / appraisal ratios.
However, by increasing at this point the interest rate service buffer used when calculating whether or not to grant a new loan, APRA may choose to continue using this measure, which is easier to integrate. for banks in their mortgage loan models.
The Commonwealth has already toughened its rules
Commonwealth Bank (ASX: CBA) has already moved its maintenance buffer from 5.1% to 5.25%, so it will only need to make an incremental change now.
The effective increase in the sustainability cushion increases the ability of the bank’s customers to bear higher interest rates before obtaining a loan, but also reduces the amount of money they could borrow.
The OECD and the IMF have both called on Australian regulators to intervene to calm the booming real estate markets in Sydney and Melbourne by tightening lending standards.
Loans are increasing, but not the supply of land
Higher prices obviously increase loan sizes, with data from the Australian Bureau of Statistics showing average new mortgages increased by $ 94,000 in Victoria and $ 120,000 in New South Wales over the past year.
While these increases may be affordable due to falling interest rates, this could change quickly and lead to increased risk of default.
Other problems in the housing market include the very slow supply of new land developments which have worsened housing supply and affordability.
The other issue to consider is that the emergence of the economy from the pandemic has the potential to dramatically increase the number of homes for sale and potentially exert natural downward pressure on prices.
The end of lockdowns could also reverse the trend towards regional ownership, with working from home potentially becoming less popular.