In a report released this week, the International Monetary Fund (IMF) warned that - with more acute risks concentrated in a few specific housing market segments - policies should focus on further strengthening resilience to housing market and other shocks with macro-financial implications.
“With continued upside risk to house prices, APRA should stand ready to intensify targeted prudential measures, if investor and other risky lending or house price growth were to re-accelerate,” the report said.
“However, the scope and extent of tightening need to be carefully calibrated, so as not to trigger a sharp correction.”
Investors continue to drive strong growth in mortgages despite efforts by APRA to cool the segment. The latest figures from the ABS show the value of housing finance commitments increased by 1.8 per cent month-on-month in September, led by a solid month-on-month rise of 4.6 per cent in investor finance.
The jump in investor finance lifted annual growth to 9.6 per cent as property investors continue to take advantage of record-low rates.
The IMF report highlighted that Australian house prices and household debt ratios have risen further in the low-interest environment post-GFC, up from already high pre-crisis levels.
Interestingly, the IMF warned that there are risks to global trade from rising populism and nationalism in large economies and from tighter and more volatile global financial conditions.
“A major concern is that external risks with a large impact, including a sharp growth slowdown in China, could interact with or even trigger domestic risks, especially a housing correction,” it said.
The report’s suggestion that APRA should “stand ready” to announce further lending curbs come after APRA boss Wayne Byres highlighted that risks in the housing market “remain elevated”.
Addressing the Senate economics legislation committee in Canberra on 20 October, APRA chairman Wayne Byres said the association’s supervisory work on housing lending standards is ongoing.
“Over the past year, we believe the industry has appreciably improved its lending standards. But risks within the housing and residential development markets remain elevated,” Mr Byres said at the time.
“Given the environment of heightened risks, our objective has been to reinforce sound lending standards, particularly in relation to the manner in which lenders assess the capacity of borrowers to service their loans,” Mr Byres said.
Speaking to Mortgage Business, AMP Capital chief economist Shane Oliver echoed this sentiment, saying that APRA is likely to “tighten the screws” further on banks' lending standards, particularly because Sydney and Melbourne’s property markets have remained “remarkably strong”.
“Now with interest rates set to remain very low for an extended period, possibly even falling further, it will fall to APRA to try and slow things down,” he explained.
“That could take the path of lowering the growth thresholds for lending to investors. It’s currently 10 per cent, APRA might decide that it should be lowered to 6 per cent, or might [introduce] further directives along the lines of just tightening lending standards generally,” he said.
Mr Oliver said that the increasing lending criteria would likely “make it harder” for consumers to obtain a loan, particularly first home buyers.
“If we’re going to see tougher lending standards, it usually hits [FHBs] first, because those lending standards come in the form of lower loan-to-valuation ratios or tougher income tests,” he said.
While Mr Oliver highlighted that further lending curbs would make it more difficult for consumers to access finance, he emphasised that APRA’s actions are likely in the interest of financial stability in the economy.
“The problem I think for Australia would be if the property market continued to run as hot as it is in Sydney and Melbourne, and that could lead to a big bust, or set us up for a downturn down the track,” he said. “Ideally it’s better to cool these things down before they get totally out of hand.”