In his address to the Chamber of Commerce on Monday (16 July), Treasurer Scott Morrison claimed that the Australian Prudential Regulation Authority’s (APRA) caps on investor and interest-only credit growth had the “desired effect” of “managing” house price growth, particularly in Sydney and Melbourne.
“The heat in the housing markets in Sydney and Melbourne was causing some real difficulty,” Mr Morrison said.
“We had double-digit dwelling price growth there. We had interest-only loans as a percentage of new loans well up over 40 per cent. At one stage, they ticked close to 50 [per cent].
“Eighty per cent of household debt is mortgage debt and the level of household debt in Australia is at high levels.
“[The] government, through APRA, took some action and that was to restrict access to interest-only loans. There was also a credit speed limit put on new investor credit, and that has had the desired effect of bringing Sydney and Melbourne housing markets back to more normal transmission.”
While the 10 per cent cap on investor loans has now been removed (subject to certain conditions), some industry players — such as CoreLogic’s director of research, Tim Lawless — have said that the removal of APRA’s “redundant” cap on investor lending is unlikely to prompt a rebound in investor credit growth amid continual softening in housing market conditions.
Speaking to Mortgage Business, the chair of the Property Investors Council of Australia and managing director of Empower Wealth, Ben Kingsley, said that regulators should continue to review current measures to ensure they don’t have a lasting impact on the broader economy.
“I definitely think that the [investor speed limits] were required at the time, and I think [APRA has] done a very good job of reducing the excess demand certainly for investors,” Mr Kingsley said.
“We were seeing investors get to a level of market share which was unsustainable in the longer term.
“[Now] that it’s served its desired purpose, we now need to lift our eyes and effectively start to look at what appropriate credit measures are in place because tightening credit is not necessarily good for the broader economy.”
Also speaking to Mortgage Business, NAB chief economist Alan Oster suggested that he was not concerned by claims of nationwide weakness in the housing market.
“Clearly, APRA has slowed the demand for investor credit, but at the same time, owner-occupier, particularly first home owners, have sort of picked up the slack,” Mr Oster said.
“[APRA has] changed the composition of credit between [investor and owner-occupied], and the big markets like Sydney and Melbourne are basically investor-driven, so of course, you’ve had a bigger impact there.”
He continued: “Sydney markets from peak to trough are around 4 per cent down, and Melbourne’s about 2 per cent down, but if you go from the previous trough to where we are now, they’re 40 per cent up.
“I don’t really see a big crunch in house prices going forward. [What] we’ve got is actually a postcode issue, not a systemic issue.”
Further, in minutes released from its July board meeting, the Reserve Bank of Australia (RBA) also maintained a positive attitude on slowed credit and housing market conditions.
“Housing credit growth had declined, mainly because investor demand had slowed noticeably,” the central bank’s minutes read.
“Lending standards were tighter than they had been a few years previously and the Australian Prudential Regulation Authority’s supervisory measures were helping to contain the build-up of risk in household balance sheets.
“Some further tightening of lending standards by banks was possible, although the average mortgage interest rate on outstanding loans had been declining for some time.”
Big banks to lift rates
The RBA also noted recent out-of-cycle changes to banks’ interest rate offerings, claiming that despite hikes from some non-major lenders, the general trajectory of interest rates is down.
“In recent months, the major banks had announced lower interest rates for some new loans, including some loan products for investors and interest-only loans. Some smaller banks had increased their advertised standard variable mortgage rates over the previous month,” the RBA’s minutes read.
“Members observed that, while changes in advertised housing lending rates had not been in a particular direction overall, lending rates for new and outstanding variable housing loans had drifted downwards over much of the prior year.”
However, Mr Kingsley expects the big four banks to follow suit with similar rate increases.
“We’re delicately poised, our cost of funds is going up because the US Federal Reserve is raising cash rates, and those second-tier and third-tier lenders have to source their funds externally, so they’ll be passed on,” Mr Kingsley added.
“I can’t see the big banks maintaining this pressure on their margins further, but while there’s a royal commission on, it’s a PR nightmare for them if they were to raise interest rates at this time.”
Despite the rate hikes, Mr Oster observed that the recent credit slowdown has prompted lenders to offer greater unadvertised discounts on their mortgage products.
“In reality, one of the other things that has happened is credit has slowed a touch, relative to where it was, so everybody’s been applying larger discounts. You do need to see what people are actually paying, rather than what the headline rate is,” Ms Oster said.
Treasurer Morrison claimed that lower interest rates offered in the last few years have provided households with a “buffer” that would help offset future rate increases.
“There’s about two and half years of buffer on household mortgages through offset accounts and things of that nature, so what people largely did was, as rates fell, they just kept paying at the same rate and they built up buffers on their mortgages.
“The system currently is quite resilient to any potential move in that space and other members of the [RBA] have made the same point.”