How will the proposed introduction of macroprudential measures to slow our property markets eventually play out ?
Felicity Emmett from ANZ Bank looked at recent statements made by the Council of Financial Regulators ahead of the changes and gave the following report....
The chances of macroprudential measures being introduced by late this year or early 2022 have strengthened over the past week or so.
Most importantly, the Council of Financial Regulators (CFR), in its quarterly statement, highlighted the increasing risks to the economy if credit growth continues to accelerate:
The Council is mindful that a period of credit growth materially outpacing growth in household income would add to the medium-term risks facing the economy, notwithstanding that lending standards remain sound.
Against this background, the Council discussed possible macroprudential policy responses.
The CFR is chaired by the RBA Governor, Phil Lowe, with the heads of APRA, ASIC, and Treasury also members.
With APRA now planning to publish an information paper on the framework for macroprudential policy implementation, it seems as though measures could be expected relatively soon, assuming credit growth remains at a significant margin above household income growth (which we and the RBA think is almost certain, given the momentum in the housing market).
The Treasurer chips in
The CFR discussion of macroprudential controls follows comments over the past week from both the Treasurer, Josh Frydenberg, and the RBA’s Assistant Governor (Financial System), Michele Bullock.
In an interview with the AFR, Frydenberg, who attended the CFR meeting last week, noted:
It is important to continually assess the appropriateness of our macro-prudential settings.
We must be mindful of the balance between credit and income growth to prevent the build-up of future risks in the financial system.
Carefully targeted and timely adjustments are sometimes necessary.
Frydenberg’s comments follow Bullock’s speech last week, where she highlighted that monetary policy needs to remain accommodative to support the broader economy, but the RBA is “looking to these other tools to address financial stability concerns”.
The IMF has also weighed in.
The International Monetary Fund noting that:
The macro-prudential policy should be tightened to address gradually rising financial stability risks.
The issue for the regulators is not banking stability but is more about macro stability in the event of an economic shock when households are more likely to pull back sharply on spending if they are heavily indebted. RBA concerns are centred around household debt growing at a substantially higher rate than household income.
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Housing credit grew 6.2% in the year to August, but growth has accelerated recently and over the past three months has annualised at just under 9%. In her speech last week, Bullock noted that the RBA expects it to reach 11% over the coming months.
This is consistent with the recent strength in housing finance.
In the Q&A session of her speech last week, Bullock outlined a number of measures that are under consideration, including increasing the interest rate buffer used in serviceability assessments (currently at +2.5%), restrictions on the share of high debt-to-incomes loans, and restrictions on high loan-to-valuation (LVR) mortgages.
It’s possible that a combination of all three measures may be introduced, although, in the first instance, our view is that the first two options are more likely than the third, as restricting high LVR loans is likely to hit first-home buyers hardest.
The share of high debt-to-income loans (above 6x) has risen significantly over the past year or so and is now at 22%, well above the 16% share seen prior to the pandemic.
Housing credit looks set to accelerate further
While credit growth is the target of macroprudential measures, tighter measures will likely see house price growth slow.
The ANZ Bank view has been for some time that macroprudential controls would be introduced by year-end, and that is factored into our forecasts for house price growth to slow from just over 20% in 2021, to closer to 7% in 2022.
If a macroprudential policy is not tightened then we would need to consider revising our forecast for house price growth up – perhaps by a considerable margin.
ANZ anticipate regulators will go lightly in the first instance.
Their aim would be to slow credit growth to a level closer to income growth (which averaged close to 4% in the decade prior to the pandemic).
They will want to avoid a sharp crackdown on lending which could feed through to lower house prices and weigh on consumer spending and housing construction at a time when both monetary and fiscal policy are aimed at cementing a strong economic recovery.
Achieving these different outcomes will require a delicate balance.