Decision a blow for industry
Despite strong calls from mortgage brokers, aggregators and peak industry bodies to reduce the mortgage serviceability buffer, APRA has today confirmed the buffer will remain at 3%.
The Australian Prudential Regulation Authority announced on Monday, November 25, that the current macroprudential policy settings would remain steady following its regular review of domestic and international economic and financial conditions and risks.
The decision means:
- the mortgage serviceability buffer will remain at three percentage points;
- the countercyclical capital buffer will remain at 1% of risk-weighted assets; and
- no limits on lending or constraints on capital distributions are being introduced.
APRA’s decision to retain the 3% mortgage serviceability buffer comes despite the mortgage and finance industry, including the MFAA, FBAA, and REA Group (which includes Mortgage Choice and PropTrack), calling for APRA to lower the buffer.
They put forward their arguments while making representations to the Senate Economics References Committee, which is leading an inquiry into Australia’s financial regulatory framework and homeownership and is due to release its final report in December.
APRA’s reasons for sticking with 3% buffer
APRA said macroprudential policy tools are aimed at mitigating financial stability risks at a system-wide level to promote a safe and stable financial system that enables households and businesses to confidently borrow, save and invest for the future.
In reaching a decision to keep the settings steady, APRA said it took account of “high household indebtedness and a pick-up in credit growth, persistent cost-of-living pressures, a weakening jobs market and heightened geopolitical risks”.
“Balanced against these risks, APRA noted that bank lending standards remain sound and non-performing loans remain low,” APRA stated.
Household risks remain
APRA chair John Lonsdale (pictured above) said the risk of financial shocks had persisted over the past year however the sources of economic uncertainty had shifted.
“Since APRA’s last announcement regarding its macroprudential policy settings in July, inflation has continued to moderate and the risk of higher interest rates has receded somewhat, but we are mindful of potential shocks to household incomes from a slowing labour market,” Lonsdale said.
“That risk is exacerbated by uncertainty in the global economic environment including geopolitical instability.”
Lonsdale said credit continues to flow to households and businesses and was accessible to good-quality borrowers.
“Although house price growth has eased, prices are still 40% higher than before the pandemic, and household debt is high relative to incomes both compared with long-term trends and relative to international peers.
“This high household debt is a key vulnerability if adverse economic scenarios came to pass.”
APRA has also seen an uptick in non-performing loans, with the potential for further rises, especially if unemployment increases, Lonsdale said.
For these reasons APRA had decided to stick with its current macroprudential settings. However, Lonsdale said it would continue to closely monitor the external operating environment and consider modifying those settings if it was appropriate.
Buffer exceptions
In its information paper detailing the latest macroprudential settings, APRA said ADIs must assess all new borrowers’ ability to meet their housing loan repayments at an interest rate that is at least three percentage points above the loan product rate.
“This buffer provides an important contingency in the years ahead for shocks to a borrower’s ability to service the loan that may otherwise result in default,” APRA stated
The shocks include a reduction in borrowers’ incomes, an increase in their expenses, or a change in individual household’s life circumstances, such as an unforeseen illness, or a change in the broader economic environment such as increases in interest rates, higher inflation, or a weakening labour market.
“APRA allows ADIs discretion to make exceptions on a case-by-case basis where it is prudent to do so.”
It said banks used exceptions to serviceability policies for about 5% of new housing loans over the past year, up from2% to 3% per cent in the years prior, partly reflecting the high level of refinancing by existing borrowers over that period.
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