Government urged to limit ‘destructive’ APRA powers

Propertyology’s head of research, Simon Pressley, has called on the federal government to loosen the Australian Prudential Regulation Authority’s “grip” on credit supply.

Mr Pressley said that the decline in housing approvals is a “much deeper issue” than falling property prices in Sydney and Melbourne.

“The grip that APRA has on national credit supply is so tight that we now have a significant blockage in a major artery of the economy,” Mr Pressley said.

“If the federal government doesn’t quickly intervene, much of the good work of the past few years will be quickly undone, and 25 million Australians will pay the price.”

Mr Pressley said that he expects APRA’s macro-prudential curbs on investor and interest-only lending over the past few years to have broader implications on the Australian economy.

“This will soon become a drag on retail spending and job creation,” the head researcher said. “It will stymie any chances of the wages growth that everyone has been waiting patiently for [and] it will create a big red hole in state government finances due to the signification reduction in property taxes and GST receipts.”

Mr Pressley added that while credit policy changes may have been well-meaning, there was always going to be “unintended consequences”, given APRA’s “sledgehammer approach” to credit policy nationwide.

“The property boom barely got outside of Sydney and Melbourne, yet the entire nation was subjected to the changes. Other states would actually benefit from stimulus, not tightening,” Mr Pressley said.

Mr Pressley continued: “I estimate that APRA’s actions have directly resulted in a 5 to 7 per cent drag on property prices nationally over the last 12 months.

“But, make no mistake, if the federal government doesn’t intervene very soon, there will be a big knock-on effect to the economy.”

Further, Propertyology’s head of research said that, given the technological advancements of the last 10 to 15 years, there should have been significant improvements in loan application efficiencies.

“If we were aspiring for a world-leading banking system, we’d be aiming to approve something as simple as a home loan within 24 hours. Instead, the loan assessment processes have blown out to three or four weeks.”

Mr Pressley was also critical of the “ridiculous” mortgage stress tests applied by lenders.

“For decades, a borrower’s ability to service loans has always been stress-tested with an interest rate loading of about 1.5 [per cent] higher than the rate on offer,” Mr Pressley said.

“Today, a borrower might apply for a loan with a 4 per cent interest rate, but the bank will be assessing affordability using between 7.25 and 8 per cent.

“To put into context just how ridiculous that is, there hasn’t been a single increase to the RBA cash rate for more than two years — borrowers may be dead before we see 16 rises of 0.25 [of a percentage point] a pop.”

Mr Pressley claimed that credit assessors appear to be “blatantly disregarding” a borrower’s ability to adjust their discretionary expenditure and honour financial obligations.

“This isn’t America. Australian borrowers have their own skin in the game when they buy a property. They are required to stump up a genuine deposit and can’t simply hand the keys back if they don’t want to pay the loan back,” Mr Pressley said.

“If they fail to honour obligations, their poor credit history becomes public knowledge and their entire financial future is grossly in jeopardy.

“That’s always been the way. An overwhelming majority of Australian borrowers will do whatever is required to stop their home loan or investment loan falling into arrears. Our nation’s track record of low home loan arrears and low bankruptcies proves that. If it ain’t broken, why fix it?”

Mr Pressley concluded: “Circulation of money through Australia’s economic system diminishes when someone turns the credit tap off, and funding for much-needed infrastructure dries up when state and federal government revenue reduces because fewer people are paying fewer property taxes.

“Australia already had responsible lending policies. Clearly, we needed better policing of those existing policies. Instead, what we’ve seen from APRA is radical and unreasonable reform that, unless stopped, poses a real risk of a road to recession.”

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