APRA-engineered housing correction ‘impressive’: Moody’s

According to Moody’s Analytics’ analysis of recent price trends in the Australian housing market provided by CoreLogic, the Australian Prudential Regulation Authority’s (APRA) macroprudential measures have helped “engineer” a “soft landing” off the back of a prolonged period of growth.

Moody’s noted concerns over Australian households’ high level of exposure to the property market, citing the nation’s household debt to disposable income ratio, which it stated was running at close to 200 per cent.  

However, Moody’s claimed that several factors have helped keep “panic” over rising household debt “at bay”, making specific reference to lending restrictions imposed by APRA.

“This action has contributed to lending rates modestly rising independently of the RBA’s official cash rate in 2018 and to the national housing market cooling,” Moody’s observed.

Moody’s claimed that regulatory measures have “driven improvement in the quality of banks’ mortgage lending”, citing the reduction in the growth of interest-only lending.

Moody’s Analytics also stated that it’s confident in APRA’s ability to re-stimulate the flow of credit if the correction becomes sharper than antedated.  

“It is impressive that APRA has been able to engineer a likely soft-landing in house prices, and if the market were on a faster-than-desired cooling trend, the regulatory lending restrictions could be reversed quickly, if need be.”

Moody’s added: “If the moves are ultimately successful, Australia’s housing market will remain one of only a handful of developed housing markets to have avoided a sizeable correction.”

Moody’s analysis follows the recent decision by APRA to scrap its supervisory benchmark on interest-only loan growth, which APRA chair Wayne Byres said had “served its purpose”.

APRA had also announced the removal of  its cap on investor lending growth earlier in 2018.

Further, Moody’s also stated that Australia’s “favourable” macroeconomic outlook would also ease concerns over high levels of household debt, claiming that it expects GDP growth to “remain around potential for the next two years”.

“A healthy economy will keep employment growth ticking over, while the Reserve Bank of Australia is not forecast to begin tightening the cash rate until mid-2020 at the earliest,” Moody’s said.

However, Moody’s Analytics observed that there is “still cause for concern”, stating that most of household wealth is in the “relatively illiquid asset of housing”, which it said would cause “greater systematic implications if debt repayment difficulties suddenly become a broader concern”.

“So even though regulators can have a handle on managing local risks, households and the economy are still vulnerable to a broader economy-wide shock,” Moody’s noted.

[Related: APRA scraps interest-only cap]