WWN #13 – Deflating the Housing Bubble: APRA Announces New Mortgage Rules

500px Photo ID: 129251911 - Little paper house flying with some helium balloons.What’s been happening? 

In December 2014, the original round of macro-prudential policies were introduced by the Australian Prudential Regulatory Authority (APRA) amid concerns that the rise in lending was due to speculators. APRA aimed to limit investment lending growth to 10% through measures such as loan affordability tests which assess the borrowers’ ability to service their loans. In these tests, it was recommended that an interest rate buffer of minimum 2% above the loan product rate and a floor lending rate of 7% be incorporated. It doesn’t seem to have worked well however, as investors currently account for 50.2% of new home loans.

What Now?

In a move to tighten lending practices, APRA announced new macro-prudential regulations this Friday. Currently, interest-only loans account for 40% of total lending which is higher than levels last seen in 2008 (30%).

APRA’s new rules require banks to:

  • Limit the flow of interest-only lending to 30% of new mortgage lending for both investors and owner occupiers. Interest-only lending must have an LVR of above 80% and must ensure there is a strong scrutiny and justification for any instances of interest-only lending at an LVR of above 90%
  • Retain the current 10% growth cap on investor mortgage lending but must ensure that they remain “comfortably below” the benchmark.  The wording used provides considerable discretion to the regulator.

The magnitude of the changes was smaller than expected by analysts, including Bell Potter banking analyst TS Lim. The market was expecting the 10% cap on investment loans to be reduced.

APRA Chairman Wayne Byres also warned that there will be additional requirements imposed on banks when the proportion of new lending on interest-only terms exceeds 30% of total new mortgage lending.

What’s Next?

From the new rules, it appears that APRA is trying to improve the quality of mortgage lending rather than restricting supply too aggressively. However, credit growth will slow nonetheless, especially in investment lending and interest-only home loans. Investment lending growth is currently above 10% and repayments are slow so lending to investors will need to slow considerably before the 10% cap can be attained.

For two of the big banks Commonwealth Bank and Westpac, they have double the number of interest only loans compared to their competitors ANZ and NAB which would mean that they are likely to have more difficulty in meeting the new requirements.

In a viewpoint that is implicitly shared by APRA, Treasurer Scott Morrison pointed out that it is no longer a question of housing affordability but “also an issue about household debt… and the need to make sure that it is well managed from a financial stability point of view”.  And so the housing bubble continues…


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