APRA Acts – And It Doesn’t Make Sense – Again


APRA – the financial regulator for the big banks – has again decided to interfere in housing markets.

And once again the justification for this intervention is paper-thin. Apra3

APRA has instructed banks to increase the interest rate risk buffer for new borrowers from 2.5% to 3.0%.

Those applying for a new mortgage will now be assessed on their capacity to repay at an interest rate fully 3.0% higher than the headline loan rate.

The current average owner-occupier variable loan rate is 4.52%.

A new borrower’s income capacity to repay a loan with that headline rate however will now be assessed at an interest rate of 7.52%.

The last time average mortgage rates were at 7.5% was in 2011 – ten years ago when a mining boom had the RBA busily raising rates.

APRA is yet again justifying interfering in housing markets on fears of higher interest rates – despite the RBA clearly and consistently pronouncing that rate will not rise until at least 2024.

Official interest rates haven’t increased for 10 years.

And the perceived current risks to possibly higher rates in 2024 will be clearly offset until then by income increases, falling mortgage balances reducing indebtedness, and higher house prices increasing household wealth – with an overall resultant strengthening of household balance sheets.

APRA counterintuitively is also predicting a near-term, post-covid economic revival which would surely only help to offset their perceived mortgage risks from lower incomes.

Models used by APRA comparing incomes to loan sizes are clearly misleading in determining mortgage risk, as risk-neutral borrowing capacity can be increased with a given income through a lower interest rate.

The loan repayment proportion of incomes more appropriately reflects the health of household balance sheets.

Although the national new loan repayment proportion of income has increased recently as borrowers struggle to keep up with rising house prices, levels still remain at around the long-term average.

Mortgage defaults and arrears remain at low levels despite the economic constraints of the past year, indicating that households are maintaining their financial positions.

Household savings are also at high levels.

The APRA action may encourage borrowers to maximise income capacity to keep up with rising house prices therefore perversely increasing mortgage risk.

Borrowers may also be motivated to use current record-level savings to provide a higher deposit for home purchases to maintain borrowing capacity, also weakening household balance sheets. House And Loupe On The Map Of Australia In Colors Of Australian

And higher interest rates are bad news for first home buyers already struggling to keep up rising house prices without the benefit of a home trade-in, disadvantaged by the recent expiration of government support measures– and who will now have to find more income or deposit.

Investors however may maximise income capacities to accommodate higher rates by increasing portfolio rents, with tenants already facing skyrocketing rents.

APRA previously interfered in housing markets in 2018 by acting to restrict home lending and its justification similarly at that time was to offset risks from potentially higher interest rates.

ALSO READ: APRA just made it harder to get a loan in order to tackle booming housing markets

Official rates however have fallen dramatically since then – from 1.5% to a current record low of 0.1%.

Following the APRA actions of 2018, house prices crashed, falling by more than 10% in both Sydney and Melbourne over 2018/19.

The current boom in house prices is a response to those declines with markets still in catch-up mode – house prices have actually averaged only around 4% annual growth since 2017.

APRA housing market interventions have also been a catalyst for the recent collapse in residential investor activity to record low levels, resulting in a chronic shortage of rental stock and sharply rising rents.

The collapse in the new apartment market since 2016 can also be attributed to restrictive lending practices with the clear specter of housing shortages emerging in the near future – particularly as borders re-open. Interest Only Lending Australia

Housing markets have clearly been self-correcting recently as higher prices organically reduced affordability and side-lined buyers.

Price growth rates have halved over the past three months and housing loans have also declined over each of the past three months.

APRA’s policy action, although unnecessary, was inevitable given the recent escalating debate on the possibility of housing market intervention and the failure of policymakers to clearly address the likelihood of such intervention.

Failure to act in these circumstances would have likely resulted in home loan demand brought forward to avoid future stricter lending conditions.

Regardless, home loans have now become more costly for borrowers.

Given the overwhelming market power generously provided to the Big Four Banks and by extension APRA – the exercise of that power must clearly be directed in the consistent interest of the consumer and the broader economy.

Its time for the government to consider rebalancing that relationship and the structures that support it.

ALSO READ: Here’s how APRA caps could impact how much you could borrow


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Dr Andrew Wilson, Chief Economist of www.MyHousingMarket.com.au is widely regarded as Australia’s leading property economist.

'APRA Acts – And It Doesn’t Make Sense – Again' have 8 comments

    Avatar for Dr. Andrew Wilson

    October 9, 2021 Malcolm

    Agree entirely with the heading, “APRA does it again” !! Once more, the first home buyer will continue to rent while saving for a larger deposit and in the meantime, “ready” buyers will continue to compete against each other. Either way, the existing property owner will win, particularly if they are an investor and wish to sell or have an increasing demand for their rental stock. Intending investors will be hit and then we will have Social Housing groups screaming about the lack of rental stock. Keep APRA out of the market; they simply do not understand !


    Avatar for Dr. Andrew Wilson

    October 8, 2021 Alex

    It looks like this move is targeted to affect investors more than first home buyers. First home buyers can get a fixed 2 year loans for around 2.25% so their payment serviceability would now be based on 5.25% rather than 4.75%. What it does it is reduce the maximum amount they can borrow by 10%.
    Investors generally do not get the benefits of FHB’s and pay higher interest rates in the region of 3.0% – 4.5% so the service cap becomes far more punitive to them.
    So this is a move to take a little heat out of the market buy discouraging investors and limiting price increases by reducing the amount people can borrow but not the availability of loans. Housing prices will still increase as credit is still available and interest rates are still at historical lows but maybe not at the same rate we have seen over the past 12 months.
    If any Australian government wants to get re-elected then rising house prices is probably one of the most important factors required to achieve that outcome. With an election looming this move is window dressing to show action to those people who are complaining that they have been locked out if the market due to rising housing prices. It won’t stop prices going up but it will slow the rate of rise.


    Avatar for Dr. Andrew Wilson

    October 8, 2021 Jaimie Yates

    Says he that probably has a great housing portfolio, on the flip side I have 5 children in the 24 to 32 age group only one is in the housing market , 4 are not they are based Sunshine Coast, Queensland that has seen a massive influx and rise due to Covid and the southerners escaping constant lockdowns and a change in lifestyle, these rather large increases have priced them somewhat out of the market , I know a lot of their friends in this age group that have borrowed excessively to enter the market and are doing just ok , for now . People have got to remember that this age group is way different to mine (56 yr old) I was brought up to work hard scrimp and save buy a house , raise a family , not as die hard as my father or his father but we are at that last age group before the change , this age group travels , owns the latest 4WD cars , drinks store bought coffee every day and dines out 3 times a week , they all have credit card debt, they don’t view their jobs as long term jobs changing them regularly and think they can make a living from posting photos on Instagram. All this has been curbed by 2 years of Covid and lockdown. I know dozens of new homeowners like this , already just under the surface there is struggle and those that have decided to have kids there is struggle and stress both financially and emotionally.
    Covid will end or be managed we will come out of this and start to move around the planet and things will go back to pre pandemic ways ….
    This is where we will see massive defaults, it’s already lurking just under the surface .

    Me personally I think the brakes should have been gradually applied ages ago , But we do have an up coming election next year we wouldn’t want the wheels to fly off this out of control housing boom to early now would we .


    Avatar for Dr. Andrew Wilson

    October 8, 2021 Guy McLennan

    Thanks Andrew, an insightful piece. Just out of curiosity, if you could influence policy makers, what measures would you propose to balance booming home prices in a fair and sustainable way?


      October 8, 2021 Michael Yardney

      Guy – you’ll hear Andrew’s thoughts on this in next week’s Property insider video that we record every Tuesday – I will ask him your question – you’ll see it here on Property Update on Wednesday morning or at http://www.PropertyInsiders.info


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