Macroprudential controls needed to cool housing market

The Reserve Bank of Australia (RBA) and Australian Prudential Regulation Authority (APRA) recently pointed out they do not target house prices but they do target lending standards and trends in household debt. These are key components of their financial stability objectives and recent developments on both these fronts are likely to be concerning for the regulators. 

"ANZ Research’s expectation is credit growth will lift above 7 per cent by the end of 2021 and will grow above household income by a significant margin for the next few years.”

The latest data shows pressure to cool the housing market has intensified. Housing finance commitments rose 4.9 per cent month-on-month in May and are up a massive 95 per cent over the past year.

Moreover, investor lending is accelerating, rising more than 30 per cent over the past three months, suggesting a speculative element is emerging in the market.

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Housing credit growth is accelerating

This strength in housing finance is quickly feeding through into credit growth. It rose 7 per cent annualised in May, the highest rate of growth since 2015.

The recent gains in housing finance suggest credit growth is set to pick up significantly over coming months.

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May data shows credit growth is already outpacing income and the gap is likely to widen. ANZ Research’s expectation is credit growth will lift above 7 per cent by the end of 2021 and will grow above household income by a significant margin for the next few years.

This forecast already includes assumptions house price growth will slow over coming months as slightly higher mortgage rates feed through and macroprudential policy is implemented by year end.

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Lending standards are easing

Moreover, the proportion of high loan-to-valuation (LVR) loans and high debt-to-income (DTI) loans has crept up.

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Under these conditions, it is not surprising APRA and other members of the Council of Financial Regulators (CFR) are concerned. As ANZ Research expected, APRA has started the process with a soft-touch approach.

The CFR quarterly statement noted, “APRA has written to the largest Authorised Deposit-taking Institutions (ADIs) to seek assurances that they are proactively managing risks within their housing loan portfolios, and will maintain a strong focus on lending standards and lenders' risk appetites”.

More than one measure is likely

The CFR has also been discussing potential policy options to address the risks in the housing market. RBA Governor Phil Lowe noted these options include increasing the buffer on the mortgage rate (currently at 2.5 per cent) to determine serviceability, targeting high LVR or high DTI loans.

Other options he recently suggested include restrictions on investor lending and interest-only lending. Although at present these are running well below historical shares.

With credit growth set to accelerate over the coming months, ANZ Research expects APRA will announce hard macroprudential controls by the end of the year.

The strongest likelihood is more than one measure is introduced and the choice will depend on how the data evolves over the next couple of months.

Fine tuning a gentle slowdown in the housing market will be a challenge. The regulators will want to avoid triggering a sharp turnaround in house prices, so ANZ Research expects they will go lightly in the first instance.

Felicity Emmett is Senior Economist and Adelaide Timbrell is Economist at ANZ