Think Big: Will booming property prices warrant the return of macro-pru?
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Australia’s booming property market is on fire, but CBA doesn’t expect regulators to tighten lending standards this year.
Helped by a combination of high savings rates and rock-bottom interest rates, house prices nationally posted their largest annual gains since 2003 in February.
And the general pace of housing activity has brought the prospect of some kind of regulatory intervention up for discussion.
But CBA senior economist Kristina Clifton highlighted that for the RBA and bank regulator APRA, rising house prices in and of themselves won’t be the catalyst.
Rather, regulators will flag changes only when they see evidence of lax lending standards and broader indicators of financial stability risks.
Previous regulator forays into the housing market have come in the form of macro-prudential measures, which were targeted at slowing the pace of loans to housing investors (as opposed to owner-occupiers).
The first was in 2014, and the second was in 2017 when APRA capped interest-only loan issuance at 30pc of all new loans.
Both measures (since wound back) served to tapped the brakes on property prices, particularly in Sydney and Melbourne where investors were more prevalent.
In assessing the likelihood of more macro-pru, Clifton assessed the current trends for key lending metrics accompanying the post-COVID rebound.
Extrapolating that forward, she maintained the CBA view that “we are unlikely to see any macro prudential policies put into place in 2021”.
Clifton also emphasised the federal government’s proposed changes to responsible lending laws, which in some ways could free up the approval process for credit assessment procedures.
So rather than macro-pru intervention, it’s possible that lending “becomes a little less restrictive in the near term”, Clifton said.
If things do start to get a little hot, Clifton said regulators will take their cues from a number of broad lending metics, start with loan-to-valuation ratios (LVRs).
Higher LVRs are considered more risky, because the outstanding loan represents a bigger portion of the property’s value.
The number of loans with an LVR above 90pc has “lifted a little over 2020, but remains fairly low,” Clifton said.
In addition, the owner-occupier market is being supported by the government’s First Home Loan Deposit Scheme, which has “allowed some first home buyers to borrow with a deposit of just five per cent”.
As highlighted above, interest only (IO) loans were the target of the most recent macro-prudential measures in 2017.
The aim was to reduce the flow of IO lending as a percentage of new loans issued, and it worked:
Even with the post-COVID surge in prices, data to the end of December showed IO lending still only comprised around 20pc of new loan flow.
“We would likely need to see a sharp lift in the share of IO lending to trigger any macro prudential policies,” Clifton said.
Debt to income ratios (DIR)
This is a commonly-used metric among property watchers, given Australia has one of the highest debt-to-income ratios globally.
The national DIR has been climbing steadily for 30+ years, accompanying the structural decline in interest rates over that time.
Last year, it actually ebbed back slightly as housing income rose “thanks to government support through the pandemic”, Clifton said.
She added that so far, the share of new lending at high DIRs “has remained fairly steady over 2020”.
Feeding into the outlook for debt-to-income levels is credit growth, which has been in the sights of several economists since the housing market upturn.
In the previous iterations of macro-pru, restrictions on credit were targeted specifically at investor loans.
However, a feature of the post-COVID boom is that “new lending to owner-occupiers has been by far the biggest driver of the latest lift in lending growth since mid-2020,” Clifton said.
For example, housing finance data from the ABS showed showed annualised loan growth ripped higher by 31.2 per cent in December, largely due to a 38.9 per cent surge in lending to owner-occupiers.
But again, Clifton doesn’t expect any action is imminent.
More broadly, housing credit growth is running at 4.6 per cent on a six-month annualised basis, which marks a “modest acceleration”.
“Both owner-occupier and investor credit has lifted, but investor credit is still very soft,” Clifton said.
In addition, she said credit growth isn’t flowing through to a sharp lift in the overall debt-to-income ratio.
While the lift in credit growth has been modest, households have also used “the reduction in interest rates to speed up debt repayment”, Clifton said.
Based on CBA’s internal data, around two-thirds of the bank’s mortgage customers were ahead on their loan repayments as at June last year, while 33 per cent were more than two years ahead.