APRA fiddles while housing risks grow

From Westpac today (emphasis added):

….With the Reserve Bank sharing our caution around 2018, along with ample capacity in the labour market (unemployment rate is 5.9% compared to full employment rate of 5.0%) and stubbornly low wages growth, there is only scope to cut rates. But as we have argued consistently, a resurgent housing market disallows such a policy option. Indeed, the minutes refer to “a build- up of risks associated with the housing market”. A tighter macro prudential stance seems appropriate.

Indeed, as we go to press, APRA has announced new controls, restricting the “flow of new interest-only lending to 30 per cent of total new residential mortgage lending” with a particular focus on limiting interest only loans with a loan-to-value ratio [LVR] above 80%. Currently, “interest-only terms represent nearly 40 per cent of the stock of residential mortgage lending by ADIs”, so this policy will restrict the terms at which a marginal borrower can access credit (investors and owner-occupiers). APRA also noted that they want banks to manage growth in investor credit to “comfortably remain below the previously advised benchmark of 10 per cent growth”. This is not a hard change to the target as had been mooted recently in the press (some suggesting the 10% limit could be as much as halved), but it does suggest lending to investors will continue to grow at a pace meaningfully below 10%. Looking ahead, the next RBA Stability Review (April 13) may provide more clarity on the macro prudential policy outlook and potential triggers for further action. For the time being though, the 2015 experience offers an understanding of the potential impact of this further tightening.

To head off a potential bubble burst, the RBA and APRA need to drastically slow house price growth. I am sure the big four banks are urging caution but they would be the worst hit by a meltdown. What APRA is doing is fiddling around the margins. To make housing investors think twice about further borrowing, APRA needs to cut the maximum LVR to 70%. And half that for foreign borrowers.

3 thoughts on “APRA fiddles while housing risks grow

  1. Stephen Nicholls says:

    This has chilling similarities to the US Sub-prime melt down.More alert commentators were warning about the potential problem some 2 years before the actual melt-down.There are too many parties interested in maintaining the bubble, and it is those parties who are dealing out the loans,or giving valuations,mortgage insurance,realtors etc. etc.

    • frankaquin0 says:

      How right you are, Stephen. It’s almost inconceivable (except it is sad reality) that Government policy is to make it harder for people to own their own shelter, especially as you say, we have the US “lesson” to learn from. Yet all we get is tut-tut margin scribbling to the point of near denial. The Government really does have its head up its APRA.

  2. frankaquin0 says:

    Yes – it’s a hackneyed phrase, but they really are just rearranging the deck chairs on Titanic Australia. Were caught in the current, travelling too fast, and Captain Turnbull refuses to accept there are icebergs at all. I just can’t see a solution other than hitting the iceberg, sacking the Captain, treading water (at best), and suffering endless speeches from more ineffectual politicians about how they saw coming, everyone else is to blame, trust me and I’ll never let it happen again – just like Lucy says as she pulls the football away from Charlie Brown.
    How come we aren’t smarter than this?

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