APRA, Australia's banking regulator, announced today that it is removing the 10 per cent annual cap on investor housing credit growth introduced in late 2014. JP Morgan says its removal should not be viewed as an easing of lending conditions. In fact, securing a home loan could soon be even harder.
After being in place for a little over three years, APRA, Australia's banking regulator, has announced its 10% annual cap on investor housing credit growth will be removed for some Australian lenders.
APRA said the decision reflects that Australian lenders have taken steps to improve the quality of lending, raise standards and increase capital resilience.
“The temporary benchmark on investor loan growth has served its purpose,” said Wayne Byres, chairman of APRA. “Lending growth has moderated, standards have been lifted and oversight has improved.”
Few will disagree that the initial cap on investor credit growth, accompanied by further restrictions on interest-only mortgage lending introduced by the regulator in March last year, have helped to cool Australia's housing market, especially in Sydney and Melbourne, the previous hot spots for investor activity.
However, if you think today's decision marks a relaxation of lending restrictions, don't, says Ben Jarman, economist at JP Morgan.
He says the decision to remove the annual 10% on investor housing credit growth was both well flagged and largely expected, replaced instead by further restrictions on income-based lending that could have far larger ramifications in the period ahead.
"This was expected in the wake of comments earlier in the year by APRA chairman Byres, who had described the measure as 'non-binding', now that the cycle has turned and lending standards have improved," he said following the APRA announcement.
"We have emphasised that likely removal of that measure should not be viewed as an easing of conditions, given that the tighter loan criteria that have generated weaker house price and credit growth outcomes are here to stay.
"APRA’s press release confirm this, and now suggest that even tougher measures are being introduced, with loan/debt to income restrictions now being developed."
In the APRA statement, the regulator announced that it expects lenders to develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels, and policy limits on maximum debt-to-income levels for individual borrowers.
“This provides a simple backstop to complement the more complex and detailed serviceability calculation for individual borrowers, and takes into account the total borrowings of an applicant, rather than just the specific loan being applied for,” it said.
To Jarman, this is significant.
"This creates both a stock and flow limit on leverage as it 'takes into account the total borrowings of an applicant, rather than just the specific loan being applied for'," says Jarman.
"Specific parameters here still haven’t been pinned down — for example, the proportion of the lending portfolio allowed in the high loan-to-income (LTI) category) — but given the specific buckets listed in the loan reporting rules APRA introduced in March, we have expected loans at six-times income to be significantly restricted from here."
Jarman says this will likely limit housing credit growth as well as the outlook for household spending.
"This will have a meaningful impact on credit growth, given that, as of the last HILDA survey, over 30% of debt is held in this bucket," he says, pointing to the chart below from the Reserve Bank of Australia (RBA) showing that while the share of households with debt-to-income ratios of more than 600% are small in number, they account for the overall largest share of total household debts:
"Slower credit growth, along with limited capacity for further falls in the saving rate, will be a significant headwind for consumption in coming years."
Household consumption is the largest component in the Australian economy, accounting for around 60% of real GDP.
In separate research released on Thursday, UBS analyst Jonathan Mott agreed that the changes announced by APRA are tightening, rather than loosening, lending standards.
"While on the surface lifting the 10% cap appears to be a loosening in macroprudential policy, we see these new requirements as a material tightening in standards," he says.
"While the major banks have not disclosed internal limits on Debt-to Income (DTI) for their mortgage borrowers, the Royal Commission has recently released APRA's Targeted Review into Westpac's mortgage book which showed that 49% of Westpac's sample borrowers had a DTI of six-times or greater.
"Therefore such a Debt-to-Income limit is likely to have a material impact on credit availability going forward."
Mott says this, particularly in the current regulatory and political environment, means a scenario where credit growth slow substantially cannot be ruled out.
"We believe that a number of other factors further increase the risk of a 'Credit Crunch'," he says.
"These include Bank Boards and management [becoming] much more risk adverse following the Royal Commission's allegations, mortgage brokers potentially moving from upfront and trail commission to a flat fee-for-service and the introduction of Comprehensive Credit Reporting (CCR) from July 2018 which will enable the banks to see borrower's complete debt positions."
Mott says potential changes to negative gearing rules should Labor win the next Federal election, along with interest-only borrowers rolling to principal and interest repayments, could also exacerbate a potential slowdown in household credit growth.