As property prices continue to surge, the phrase “macro-pru” has again made its way into the lexicon of market analysts.

And UBS economist George Tharenou expects to see some new macro-prudential measures deployed in the second half of this year.

Tharenou’s analysis followed the latest round of monthly house price data from CoreLogic this week, which showed dwelling prices surged by another 2.3% in May.

National property values have now risen by 11.7% in just eight months since the September 2020 trough.

And the conditions for further growth – rock-bottom rates, high demand, low available stocks and strong consumer sentiment – are all still in play for the foreseeable future.

In turn, the market is on track to hit 15% annual growth – the upside of UBS’ post-COVID scenario analysis – within “a matter of months”, Tharenou said.

Brief background

Macro-prudential measures have been deployed by APRA twice previously, in 2014 and 2017.

On both occasions, they came in the form of restrictions which tapped the brakes on investor lending in the major east coast markets (Sydney and Melbourne).

Loan growth slowed, and prices cooled at the higher end of the market. The measures were then wound back in an orderly fashion.

Too hot to handle

For policy makers, the rationale for introducing macro-pru restrictions is based around their assessment of financial stability risk.

A feature of the post-COVID boom is that lending to first-home buyers and owner-occupiers has outpaced loans to investors.

In that context, the next round of macro-pru measures could take a different form.

What are regulators looking at?

Still, it’s worth noting the RBA made a tweak to its policy announcement on Monday.

In its commentary on the housing market, it added “there has also been increased borrowing by investors” – a line that wasn’t there in the month prior, which may indicate regulators are on watch for excess heat in the investor side as well.

More immediately, Tharenou said APRA will be watching closely for any signs of deteriorating credit quality as the market runs hot.

He cited two metrics in particular; a rise in the number of mortgages with loan-to-value ratios (LVRs) above 90%, and the extent of lending examples where the debt-to-income ratio exceeds 6x.

When will macro-pru be introduced?

In terms of APRA’s timeline, Tharenou said the bank regulator has flagged possible tightening measures when it sees a “substantial increase” in the pace of mortgage credit growth relative to wage growth.

UBS expects that condition to be met by October, based on its forecast that growth in housing credit climbs to an annualised rate of 6% in the months ahead.

October also marks the next meeting of the Council of Financial Regulators (CFR), a coordinating body comprising the RBA, APRA, ASIC, and the Australian Treasury.

In that context, “our view remains that macro-prudential policy tightening will likely be implemented around October”, UBS said.

In its 2017 macro-pru rollout, APRA capped interest-only (IO) lending at 30 per cent of all new loans – a move targeted at restricting loans to investors.

For the major banks, IO loan growth fell well below that mark and house prices in Sydney and Melbourne commenced a steady decline – a trend which was only reversed when the RBA cut interest rates from 1.5% to 0.75% in the middle of 2019.