Monday 10 Mar 2014 ABC News
At the end of last week, the Reserve Bank offered a possible glimpse of the future for its housing market policy.
That future may be macroprudential policies and, judging from the comments by the bank’s governor Glenn Stevens, it will not be a New Zealand-style loan to property value cap, but a loan to income limit.
“The most effective tool could be that when banks test people for an interest rate, so you are supposed to be able to make the payments not just at the current rate but, say, 200 [basis] points higher, APRA could insist that the test be made 300 higher, or 400, or whatever, so that people do not get overcommitted,” he told the House of Representatives Economics Committee.
Banks already ‘stress test’ borrowers to see if they can afford to make repayments at higher interest rates – late last year Mike Smith said ANZ had lifted its test to 2.5 percentage points [250 basis points] above current mortgage rates, up from a 1.5 percentage point test previously.
The bank has done that in response to record low mortgage rates, with many standard variable discount rates around 5.2 per cent or lower.
At current rates, ANZ’s old buffer of 1.5 per cent would have been a safeguard only against interest rates returning to average levels (about 6.7 per cent since June 2004), and even its 2.5 per cent buffer will not protect it (or its borrowers) against rates returning to the most recent high of nearly 9 per cent, seen only five-and-a-half years ago.
So there is a strong financial stability argument for the Australian Prudential Regulation Authority (APRA) to start making banks put a 3 or 4 percentage point safety buffer on current rates when they test borrowers’ ability to meet repayments.
However, there is another, more immediately pressing, reason why so-called macroprudential policies (such as this larger interest rate buffer) may be introduced.
A Bank for International Settlements report shows that using larger safety buffers when testing borrowers’ ability to repay loans results in a fall in demand for credit, and slower lending growth usually translates to smaller home price gains.
Head off a housing bubble
While Mr Stevens told the committee on Friday that he was quite comfortable with housing loans growing at the current rate of 5-6 per cent, he also noted that he would be concerned if lending grew much faster.
He also expressed concern at the 8-9 per cent growth in loans to investors, saying “that’s probably fast enough”.
For the Reserve Bank, putting a bigger regulatory speed limit on lending means that interest rates could be either cut further, or maintained for longer at record low levels, to stimulate economic activity without further inflating Australia’s property prices.
“The benefit of that type approach is it allows lower interest rates to feed through into lower servicing costs for both new and existing borrowers, but it does not mean that lower interest rates keep on increasing the size of the loan that people can get access to,” the RBA’s deputy governor Philip Lowe told the committee.
“I think there is quite a lot of merit in exploring that. I know APRA is discussing that at various levels with the bank lenders.”
However, the bank and APRA are cautious of macroprudential policies because they can distort free markets.
One of Dr Lowe’s concerns is that fringe mortgage market players might find loopholes around any new loan limits, potentially shifting higher risk borrowers away from more conservative and closely watched large institutions towards riskier, less stable operators.
Such limits on lending, for instance, obviously increase incentives for fudging or outright fraud when loan applicants declare their incomes, offences that a few unscrupulous mortgage brokers have already been convicted of.
The other problem is that a tighter income test may not stop access to credit for wealthier buyers, particularly cashed up local and overseas buyers that may not be borrowing at all, as much as it does for first home buyers, thus making it even harder for this group which is already struggling to break into home ownership.
Mr Stevens observed that this has been one problem with New Zealand’s limit on how much banks can lend relative to the valuation of the property.
“If we were to have, say, a loan-to-value cap, who do you think will be most affected by that? It will be first-time buyers,” he told the MPs.
“I can imagine at the political level you will find that uncomfortable, should we proceed down that track.”
Least unpopular option
The Bank for International Settlements report referred to earlier actually found that the best policy for putting a lid on runaway housing prices was increased taxation, or lower subsidies.
In Australia, that could mean the introduction of a broad-based land tax that includes owner-occupied homes, an increase in current property taxes (such as stamp duties, rates and land taxes on investment properties) or the removal or reduction of subsidies such as negative gearing, the capital gains tax discount or remaining home buyer grants.
The politicians on the committee seem to find these measures even more uncomfortable, so it looks likely that the RBA and APRA will have to bear the burden of constraining any property market over-exuberance, even if the measures at their disposal are less effective and have more unintended consequences.
Given the RBA’s current commentary, it seems a fair bet that any future rate cut would be proceeded or accompanied with a new regulatory limit on home mortgage lending.
Even with rates on hold, if the housing market continues its current upward trajectory, such macroprudential tools are likely to be needed sometime this year to avoid the need to beat property price rises back by jacking up interest rates, with the wider economic fallout that would entail.
Original article here
The RBA Wants It Harder For You To Get A Home Loan
When they go to the credit union, building society or bank to get a home loan, borrowers have to prove their ability to “service” their loan over the term of up to 30, and sometimes 40, years.
“Serviceability” is the banking and regulatory term for borrowers’ ability to prove to their lender that they can not only pay back the loan amounts, but they can also live on the income they declare to the lender.
Part of proving this serviceability is that the lender will take your living expenses, any other loans, the cost of servicing the new loan and then add an interest rate buffer to work out whether you can still live and pay back the loan if interest rates rise.
Normally this buffer is in the vicinity of 2% above the prevailing interest rate on the loan:
But with interest rates at generational lows in Australia, documents released under Freedom of Information – and reported in the SMH this morning – show that the RBA is either worried that rates are about to rise significantly or that borrowers are over-committing at low rates.
Luci Ellis, the head of the RBA’s Financial Stability Unit and one of the foremost global authorities on housing prices, wrote in July last year that:
Other than avoiding an over-easing of monetary policy, the most promising policy response seems to be to introduce a regulatory regime that automatically requires larger interest buffers in loan affordability calculations when interest rates are low… This could be introduced either as a prudential measure or as part of the National Consumer Credit Code, or both.
The point is to make it harder for a borrower, at least a marginal one, to prove they can service or pay back that loan and in doing so, make it harder for borrowers to get those loans.
It’s an approach that both RBA governor Stevens and his deputy Phil Lowe seemed to have sympathy with last Friday when appearing before the House of Representatives Standing Committee on Economics and it signals that it just might be about to get even harder for new buyers to enter the market.
You can read more here