Further APRA measures "highly likely"

APRA’s move to increase the serviceability buffer that ADIs use when assessing loan applications was something of a “warning shot” that would most likely be followed by additional macroprudential measures in the first half of 2022, according to Judo Bank chief economist Warren Hogan. He told MPA that as more investors entered the market, APRA would be ready to step in with stricter measures.

“I think they’ll be doing something in the first half of next year and it will probably be in terms of limiting the amount of leverage any individual borrower can have on a loan,” he said. “From a financial stability point of view, their focus will be squarely on the investment market and they hinted at that in the Press release when they changed the mortgage serviceably buffer.”

Hogan said it was his belief the investor market would take off over the next year since savings interest rates offered very little incentive to hold on to cash.

“The first wave of this housing upswing was very much about owner occupiers and first home buyers, but investors are starting to take over,” he said. “They’re borrowing now at a monthly rate similar to what we saw during the last cycle in 2016-2017, but I think there is a real chance, particularly if the RBA keeps telling everyone rates are going to stay low, that investors will keep growing and driving prices higher.

“That’s what APRA will respond to because it’s the investors who are often heavily leveraged. If something goes wrong, it could be a bit of a house of cards for them.”

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CoreLogic head of research Asia-Pacific Tim Lawless said it was highly likely that APRA would bring out further measures to follow the increased serviceability buffer, but that this would depend on a range of factors.

“It’s probably a blend of three factors: whether or not we see a further rise in high DTI lending, whether or not we see a moderation or growth in overall credit growth and what happens with household debt levels,” he told MPA. “I think it’s a fairly high likelihood that we would see APRA tightening the credit policies further if we did see an increase in high debt-to-income ratio lending, which is probably going to be the case when we see the September quarter data.”

Lawless said it was too soon to tell whether that would be the case given only the data to June was currently available, but that there was a chance that high DTI lending had continued to grow from its June level of 22%.

“If we do see a further rise in high debt-to-income ratio lending, potentially that could be the catalyst for a further tightening - it really depends on the materiality and what APRA would consider to be a threshold for a further tightening of credit,” he said.

Other metrics to consider included overall credit growth and the level of household debt, he said. While overall credit growth had started to ease, investment credit was tracking at about 12% quarter on quarter for new loans being issued. A reduction in the rate of overall housing credit growth could help to alleviate the risk of a further tightening of credit policy, he said.

“But the third metric that is important to follow will be the level of household debt,” he said. “That data is quite lagged, it’s only up to June and is published by the Reserve Bank. We’re seeing, based on the June data, owner occupier housing debt to income ratios were at record highs. Overall housing debt to income ratios, which included both owner occupier and investors, were only about 20 basis points off being a record high, so I’m guessing by the September quarter that that’s probably reached a new record high as well, and overall household debt was nearly at a record high as well.

“This is where the Reserve Bank probably becomes a bit more uncomfortable because a heavily debt-burdened household sector implies that when the RBA eventually does push rates up there is some financial stability risk as more households need to dedicate more income towards servicing their debt rather than consumption, which is a really important component of economic activity in Australia.”

Lawless said he would be surprised if APRA further tightened its policy with a firm limit on high debt-to-income lending.

“With the advent of positive credit reporting that should be possible, but it sounds like there might be some logistics in applying that type of measure because it is assessing the overall debt level of a borrower rather than just the loan that they are applying for,” he said. “If they did move to a firm limit on DTIs that would have its own complexities and would involve some additional monitoring from APRA.”

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While limits on high debt to income lending have been used in the UK and Ireland, the measure has not yet been enacted in Australia. In 2014, the Bank of England imposed a limit that allowed for 15% of new mortgages to be at multiples higher than 4.5 times a borrower’s income after property prices grew 10% annually in Britain and more than 20% annually in London. According to Statista, house price growth in the UK slowed substantially in the years following this measure, dropping from 8.7% in 2014 to 5.5% in 2015, before jumping again to 7.5% the following year and then dropping consistently year on year until hitting 0.62% growth in 2019.