Analysis: Could regulators trigger another crisis?

Increased regulation is a global phenomenon and a consequence of the financial crisis. But how much is too much? Could lending curbs stifle growth and create an even bigger problem?

APRA’s actions over the last three years have had a profound impact on the Australian mortgage market. From the reintroduction of two-tiered pricing to 50 per cent LVRs on investor loans, home lending has become a different animal since 2014. 

Initially, the 10 per cent cap on investor lending growth took some time to take effect. Investor lending cooled for a period before bouncing back again over the last six months of 2016. This forced the regulator to announce a separate cap on interest-only loans – in addition to its 10 per cent cap on investor loans – which now appears to be having the desired effect.

However, there are problems with what APRA has done. Regional markets and capital cities outside Sydney and Melbourne, where growth was already stagnant, have suffered under a regime of tighter credit.

Now the Sydney and Melbourne markets appear to have peaked. But according to the regulator, house prices are beside the point.

One of the biggest misconceptions about APRA’s actions is that they were designed to cool the booming Sydney and Melbourne markets. But APRA chairman Wayne Byres has repeatedly said that property prices are beyond its remit, and not something the regulator is looking to control; improving lending standards is what they are ultimately trying to achieve.

The danger is that these measures, which the banks have taken as an excuse to continue hiking rates, could have a negative effect on economic growth.

Mortgages are the second largest pool of assets in Australia after superannuation. Messing with that could have serious implications. Particularly at a time when property price growth is moderating.

The risk is that measures designed to strengthen the system could inadvertently weaken economic growth, consumer sentiment and the propensity for Australians to continue spending.

The federal government is now keen on extending APRA’s powers beyond the ADIs to the non-bank sector, which has picked up as a result of the investor lending slowdown.

Pepper’s former CEO Patrick Tuttle has warned against this, and suggested how regulatory action could create serious problems for the Australian economy.

“By seeking to excessively regulate the non-bank sector, which is already subject to comprehensive regulation by ASIC, there is a real risk that the supply of credit to legitimate borrowers for legitimate purposes will dry up altogether, depriving consumers of genuine choice, and inadvertently accelerating a credit crunch and a sharper than anticipated correction in house prices,” Mr Tuttle said.

“I’ve no doubt that such an outcome would be unintended. But how often have well-meaning politicians and regulators delivered unexpected, unintended and unwelcome financial incomes which adversely impact everyday punters?”

Of course, if APRA’s controls and tighter credit were to create unintended consequences, the regulator could quite simply remove its macroprudential measures.

But AMP Capital chief economist Shane Oliver believes they are here to stay: “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,” he said.

“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.”

[Analysis: Lending curbs could be permanent]

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