Concerns raised over impact of buffer change on FHBs

On Wednesday (6 October) the Australian Prudential Regulation Authority increased the minimum interest rate buffer it expects banks to use in serviceability of home loans.

In a letter to authorised deposit-taking institutions (ADI), APRA said that it expects lenders to assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate (up from the 2.5 percentage points that are commonly used by ADIs currently).

It has followed a meeting by the Council of Financial Regulators (consisting of the RBA, the Treasury, APRA, and the Australian Securities and Investments Commission [ASIC]) as well as federal Treasurer Josh Frydenberg to discuss policy options to curb financial risk stemming from growing levels of household debt relative to income.

The lever was flagged by the Reserve Bank of Australia (RBA) governor Philip Lowe on Tuesday (5 October), when he said in his monetary policy decision statement following the decision to hold the official cash rate at 0.10 per cent that regulators were looking at maintaining lending standards and serviceability buffers “at an appropriate level”.

First home buyers to bear policy brunt, says HIA

Following APRA’s announcement, the Housing Industry Association (HIA) argued that the prudential regulator’s measure would make it even more difficult for home buyers to enter the market.

According to HIA chief economist Tim Reardon, over 90 per cent of renters aspire to own their own home but less than half of them expect to achieve this goal.

He said that first home buyers (FHB) accounted for 35 per cent of owner-occupied loans issued in August 2021, and APRA’s latest measures would “make it harder to access a loan”.

He said: “This additional constraint is being imposed despite the share of loans with a 10 per cent deposit or less declining since December 2020. This share is well below those observed over the past decade.

“First home buyers are the group who are typically constrained by serviceability thresholds. It is this group that will be hit the hardest by these changes. Restricting access to credit for new households seeking to enter the housing market will put further downward pressure on the rate of home ownership in Australia.”

Noting that around 0.4 per cent of all loans issued are impaired (significantly lower than in other developed economies), Mr Reardon said that the low levels of mortgage delinquency reflect the “restrictive lending regulations” implemented by financial regulators in Australia.

“Since 2010, financial regulations have made it increasingly conservative making it progressively more difficult for first home buyers to enter the market,” he said.

“Despite the lows levels of mortgage delinquency, APRA announced this morning that it has increased the serviceability buffer for a new mortgage from 2.5 per cent to 3.0 per cent.”

Tim Lawless, CoreLogic’s research director, told Mortgage Business that the latest round of credit tightening by APRA could have a different impact on the housing market (which is more focused on minimising risks related to housing and household debt) compared to previous rounds of macroprudential tightening, which focused on investor lending and rising levels of interest-only lending.

As such, Mr Lawless said the higher serviceability buffer would have the greatest impact on prospective borrowers who are already burdened with debt, as well as “those that feel they need to stretch their budgets in order to access the market”.

In addition, investors – who typically favour a higher level of leverage – could be more impacted than other sectors of the market, he said.

Commenting on the broader impact on the housing market, Mr Lawless said: “Overall, the impact of the higher serviceability buffer isn’t likely to send the market into a downturn, but it probably will dampen housing market activity and price growth, adding to other factors that have already seen the pace of house price appreciation slow such as worsening housing affordability and less government stimulus.”

More macro measures needed in 2022: AMP Capital

AMP Capital chief economist Dr Shane Oliver also said that investors could be most affected by the change because they have higher interest rates but warned that FHBs could be “on their heels” as they would have to “invariably stretch further in this hot market given where prices are”.

“Unfortunately, this will likely see the first home buyer share of new loans continue to decline from its highs seen earlier this year,” Dr Oliver told Mortgage Business.

However, Dr Oliver said it is doubtful that the tightening would be sufficient to close the gap between the current housing debt growth rate of around 7.5 per cent and underlying household income growth of around 4.0 per cent per annum.

As such, he said: “So, household leverage will likely continue to increase, all of which suggests that more macroprudential measures to slow housing lending will ultimately be necessary – but maybe not until next year.”

APRA stated that the overall impact on aggregate housing credit growth flowing from this is expected to be fairly modest given most borrowers are already restricted by the floor rates used by lenders, and that many borrowers do not borrow at their maximum capacity.

Nevertheless, Dr Oliver said it would add a headwind to house price growth (along with worsening affordability, reduced government incentives, and a likely rise in listings).

“But given its impact is likely to be modest and we had already allowed for macroprudential tightening, we will stick to our expectations for average house price growth to slow to 7.0 per cent next year from around 20.0 per cent this year,” he said.

Impact on house price growth to be limited

Similarly, Commonwealth Bank of Australia (CBA) head of Australian economics Gareth Aird said that he does not believe that the 50-bps increase on the minimum interest rate buffer would materially shift the property price outlook in 2022.

He has also forecast a 7.0 per cent rise in national dwelling prices in 2022, on the proviso that there are no further home lending policy changes from APRA. But he added that further changes could not be ruled out especially with APRA and other members of the CFR indicating that they will continue to monitor risks in mortgage lending and take further steps if required.

Mr Aird told Mortgage Business: “If it turns out to be the case that the housing market is still causing the council discomfort in 2022 the most likely policy response would be to further increase the minimum interest rate buffer. 

“At this stage we consider that unlikely, particularly given we expect fixed mortgage rates to drift higher over 2022.”

While APRA stated in its letter to ADIs that the 50-bps increase in the serviceability buffer will reduce maximum borrowing capacity for the typical borrower by around 5 per cent, Mr Aird pointed out that over the first half of 2021, just 8.0 per cent of home loan applicants at CBA borrowed at capacity.

“To be clear, the policy change today will result in some future applicants borrowing less money than they would have otherwise,” he said. 

“But our initial assessment is that current momentum in the housing market is sufficiently strong that the overall impact on dwelling price growth next year will be modest.”

Earlier this year, CBA pre-emptively increased its serviceability floor rate from 5.10 per cent to 5.25 per cent, while chief executive Matt Comyn recently stated that other lenders should move in the same direction.

ANZ head of Australian economics David Plank also said that further macroprudential tightening “seems more likely than not”, but only after the CFR has had time to assess the impact of its latest move.

ANZ recently foreshadowed that regulators would tread lightly on macroprudential changes to avoid a “sharp crackdown” on lending as both monetary and fiscal policy are currently aimed at boosting the economy.

Lenders to implement changes

National Australia Bank (NAB) executive home ownership, Andy Kerr said the major bank has welcomed APRA’s announcement and will begin to implement the changes.

He told Mortgage Business: “We have recognised the market conditions and we see this as a sensible change of policy considering the broader environment for house prices. We are committed to lending responsibly and this will not change.

“It is not in customers’ interests to borrow money which they cannot afford to repay, which is why NAB will continue to assess a customer’s ability to repay their loan by considering their income, expenses and overall indebtedness.”

Westpac chief executive consumer and business banking Chris de Bruin pointed out that APRA will continue to monitor non-ADI lending, adding that is “important for the health of the overall system”.

“APRA’s announcement to increase the interest rate serviceability buffer is a sensible approach in the current environment. Westpac is committed to maintaining disciplined lending standards and will implement the change in line with APRA direction,” Mr de Bruin told Mortgage Business.

A Customer Owned Banking Association (COBA) spokesperson has welcomed APRA’s decision to consult with the Australian Competition and Consumer Commission (ACCC) while developing its proposal.

It had previously flagged the potential for macroprudential interventions to have anti-competitive impacts on smaller banks.

“APRA has also signalled its intention to publish an information paper outlining its framework for macroprudential policy, including capital and credit options,” the spokesperson told Mortgage Business.

“COBA considers this paper will be an important consultation mechanism for future macroprudential policy-making and looks forward to its release.”

[Related: RBA rings alarm on high debt levels]