On Tuesday (28 September), mainstream media reports emerged that the federal Treasury had supposedly backed work by the financial regulators to look at clamping down on rising debt-to-income ratios (DTIs).
While the Treasurer confirmed in a statement to Mortgage Business that he had met with regulators last week to discuss the housing market and consider whether “carefully targeted and timely adjustments” are required, it has not yet been confirmed whether DTIs would be the macroprudential measure of choice.
Reacting to the news, several lender economists voiced surprised at the suggestion that this would be the lever that the regulators would pull to ensure the financial system (and borrowers) were protected from any threats of overly exuberant lending.
Speaking in NAB’s quarterly economic webinar for the NAB commercial broker network on Tuesday morning, the NAB Group chief economist Alan Oster said he was “surprised” by the reports.
Mr Oster said: “The headlines in the press make you think they seriously are looking at toughening in on debt-to-income ratios...
“We thought they would at least wait… we didn’t expect them to be doing anything until Christmas… and the instrument that I thought they would use would be increased [interest rate] buffers.”
The economist told broker viewers that he had believed the regulators would “wait until we get out the other side” of the current COVID-19 outbreaks before looking at introducing new macroprudential controls.
“If you believe the press [headlines], the government’s trying the idea of, essentially, curbing debt-to-income ratios. Which I think is interesting because it has very big distribution impacts. It will hurt first home owners. And it may or may not hurt investors,” he said.
Similarly, Dr Andrew Wilson, consultant economist at non-bank lender Bluestone Home Loans, suggested that the action would actually hurt investors.
He said: “Any action to yet again target investors would only exacerbate the imbalances caused by previous similar interventions, accelerating housing shortages and driving rents even higher – which have been mitigated temporarily by the covid pause in migration – reducing new housing demand by hundreds of thousands – for now.
“The recent strength of housing market activity and sharply rising prices have predictably resulted in the usual doomsayer predictions of likely calamity and significant buyer exclusion as a result of a supposedly overheated housing markets.
“The shrill calls from doomsayers for policy intervention to cool supposed runaway housing demand however doesn’t, as usual, reflect the reality of current underlying housing market...
“Concerns over possible overborrowing exposing borrowers in a bull market are not supported by current data that reveals continuing low levels of mortgage arrears and defaults despite recent volatile economic conditions, and reflects the maintenance of strict lending conditions by financial institutions.”
The Bluestone Home Loans consultant economist added that reducing housing demand would also impede economic activity more generally during a period of “significant economic lockdown stress”, impacting state governments particularly through reduced stamp duty collections.
“The usual jeopardy for housing markets perceived to be overheating is the prospect of a near-term increase in interest rates and typically used as a justification for policy interventions,” Dr Wilson said.
“The RBA has however consistently stated its position that rates will not rise until 2024 – at the earliest.
“Following a period of significant activity and strong prices growth, housing markets are self-adjusting with the clear prospect of a more moderate and predictable outlook.
“Beware the law of unexpected consequences from misguided demand control policies – and learn from the results of previous interventions.
“And just build more homes – where people want to live.”
[Related: Should lending be limited to 6x income?]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.