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.
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.
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.
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.
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.
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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.
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.
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.