In response to new measures by APRA and ASIC to curb interest-only loans, CoreLogic senior research analyst Cameron Kusher has questioned whether they will slow demand enough to curb the rate of dwelling value growth.
“All of these changes being made are aimed at improving mortgage quality, but neither APRA, ASIC nor the RBA are responsible for setting an appropriate level for growth in dwelling values,” Mr Kusher said.
“The question remains, will these measures slow demand enough to slow the rate of value growth? That remains to be seen, but we can make some educated assumption based on what has been announced.”
Mr Kusher said reducing the flow of interest-only lending might see some slowing of demand from the investor market. Although demand has been “trending lower”, he pointed out that it needs to fall from 37.5 per cent to 30 per cent.
“The limit of investor credit growth to 10 per cent annually will also slow demand to the investor segment and this is already in place so there is effectively no change here. The interest-rate buffers are also already in place so that is unlikely to have much of an impact, although it should result in marginal borrowers finding it more difficult to take out a mortgage,” he said.
“Arguably, the move which could have a substantial impact is the greater capital requirement for mortgages. More details about APRA’s approach here will be released in mid-year. The cost of the additional capital is ultimately likely to be borne by the borrower, not the lender, in the form of higher mortgage rates. Mortgage rates are already moving higher independently of the RBA and further hikes could contribute to a slowing of the market.
“While these changes may result in some slowing of the market, they are unlikely, on their own, to substantially slow the increases in dwelling values, particularly in Sydney and Melbourne.”
There are other factors that continue to contribute to growth in these two cities, Mr Kusher said.
Low interest rates are encouraging borrowing and “very strong population growth” is creating additional housing demand. On the supply side, the amount of stock advertised for sale has been falling over the past five years while demand has been growing.
“Overall, the changes are likely to slow growth in the housing market around the margins, but they are very unlikely to stop it in its tracks. With APRA, RBA and ASIC not responsible for housing values and affordability, it is clear that fiscal policy, including taxation policy, will need to play an increasing role and complement prudential and lending regulation in order to materially impact housing affordability and slow the robust growth in values being recorded in some of the capital cities currently.
“I don’t know that the moves that we’ve seen to date actually go far enough and will really have much of a cooling impact on the market.”
Interest rate predictions
The latest round of out-of-cycle rate hikes by lenders may curb investor lending appetite “a little bit,” Mr Kusher told Mortgage Business’ On the Record, however he noted that the returns offered by housing are “still pretty attractive for investors”.
Looking ahead, Mr Kusher said he believes it is likely the official cash rate will be on hold for some time.
“We know that, ideally, the Reserve Bank would probably like to lower interest rates, but they’re concerned about what impact that would have on the Sydney and Melbourne housing markets. It would probably encourage even more growth, and that’s obviously not what they want at this point in time,” he said.
“A lot will depend on how successful the APRA and ASIC crackdown on interest-only lending is, if that actually does start to see the Sydney and Melbourne housing markets slow – I don’t personally think that that’s going to be the case – then that would give them the breathing room to cut interest rates.
“Because if you look at the rest of the economy, certainly there are a lot of other areas of the economy that need lower interest rates. The big challenge is that housing is one that doesn’t need lower interest rates in Sydney and Melbourne, and they don’t want to add further fuel to the growth that we’re already seeing.”