Analysis: Lending curbs could be permanent

The Bank of England has confirmed that its own version of APRA lending curbs will become a “structural feature” of the British housing market, which raises the question: are APRA’s lending curbs here to stay?

The Bank of England ramped up its regulatory oversight of UK lenders on Wednesday in response to growing risks; it appears the debt binge is a global phenomenon and has central bankers spooked.

RBA governor Philip Lowe has made repeated warnings about Australia’s debt-to-income ratio, which is currently hovering at a record-high 190 per cent.

Now Bank of England governor Mark Carney has sounded the alarm following a significant increase in consumer credit and relaxed mortgage lending.

To fortify themselves against bad loans, British banks have been tasked with finding billions of pounds in additional capital. The UK has reintroduced its countercyclical buffer at 0.5 per cent and expects it to rise to 1 per cent in November.

While the major British banks are now well capitalised with a tier 1 ratio at 15.7 per cent, Mr Carney said: “The job is never done. Risks are always evolving.”

Like Australia, the UK has been operating in an environment of heightened banking regulation since 2014, when policies were put in place to mitigate housing market risks.

UK banks were forced to assess whether borrowers could still afford their mortgages if the cash rate was lifted by 3 per cent – essentially a serviceability requirement.

UK banks have also had to limit the proportion of mortgages at loan to income (LTI) multiples of 4.5 and above to no more than 15 per cent of their new mortgages.

Following an extensive review, the Bank of England this week announced that it “now expects these insurance measures to become structural features of the UK housing market”.

Little information has been given as to how long APRA’s lending curbs will last, or even when the regulator deems the domestic mortgage market effectively de-risked.

Following the latest moves from the UK, AMP Capital chief economist Shane Oliver believes APRA’s measures, or at least some of them, will become permanent.

“I suspect that as time goes by they will likely become a permanent feature because of the control over risky behaviour that they allow over and above that achieved by varying interest rates and because the regulatory framework necessary to administer them will become more entrenched,” Mr Oliver told Mortgage Business.

“This will particularly be the case the longer the interest rate environment remains constrained and in Australia's case it’s hard to see a rate hike for the next year or two.”

When macroprudential measures were first introduced in 2014, they were seen as a 'second best' alternative to interest rate hikes in an environment where the overall economy did not support higher rates.

But things have changed since 2014: house prices have continued to surge, adding to Australia’s housing affordability woes.

Mr Oliver believes APRA’s mortgage curbs may be seen as increasingly attractive from a social policy perspective, in that they can “tilt lending away from non-first home owner-occupiers”.

There are other reasons why APRA’s measures are likely to remain.

“Poor affordability and high household debt levels, neither of which are likely to go away quickly,” he said.

[Related: Fresh warnings over rising debt levels]

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