MNI ANALYSIS: Australia Balancing Act On Housing Risk to Econ

By Sophia Rodrigues

     SYDNEY (MNI) - Australia's financial regulators are treading a careful path

with measures to cool the housing market, wary that any unnecessary tightening

could turn the current slowdown into a downturn and hurt the economy's growth

prospects.

     In particular, the Reserve Bank of Australia has been reluctant to raise

the cash rate to deal with rising household debt because any such move would

affect all mortgage holders, including those at the margin who may not be in a

position to withstand higher interest rates.

     But Australian Prudential Regulation Authority chairman Wayne Byres

discussed in a speech Monday the possibility of removing entirely or pulling

back some of the quantitative macro-prudential restrictions, including the ones

enacted less than seven months ago. While it was always known that quantitative

benchmarks would be temporary, and they have had some desired impact, it is

surprising that APRA is already discussing a pullback.

     One reason for this could be that while the measures are having the desired

impact, they may also be having some undesirable side effects that could

increase risks for the economy or create financial stability risks. For

instance, banks may have to turn away a borrower with a strong credit profile

because it has already reached the benchmark limit on interest-only loans or

investor lending. This could force the borrower to access loans from the non-ADI

(non-authorized deposit taking institutions or shadow banks which are not

regulated by APRA) sector, where interest rates are higher, or abandon the

investment plan.

     Given the pipeline of apartment construction and the fact that investors

are likely to be the main buyers of such properties, it is important that

credit-worthy borrowers have access to mortgages at a reasonable rate. Otherwise

it could lead to stronger loan growth in the non-ADI sector and also cause a

further fall in housing prices in some cities or accelerate slowing in others --

both undesirable outcomes for financial stability and economic growth. 

     Also, any strong growth in non-ADI borrowing could pose a risk to financial

stability given the activities of non-ADI institutions are difficult to monitor

and so the impact on financial stability is difficult to assess. This will

change in future when the APRA gets the power to impose rules on non-ADIs if

their activities pose a threat to financial stability. But for now, it is a risk

that financial regulators have to manage in other ways.

     In the Financial Stability Review published earlier this month, the RBA

noted that shadow banks' share of residential mortgage lending had increased

only slightly over the past few years but its liaisons on lending for property

development showed a relatively strong increase over the past year or so, though

it had not fully offset the pullback by large banks.

     "While the banking system has minimal exposure to the non-bank financial

sector, growth in finance outside the regulated sector is an area to watch," the

RBA warned.

     MORE FOCUS ON LENDING STANDARDS

     So instead of relying on quantitative benchmarks, the APRA now appears keen

to focus more on lending standards and capital requirements because they might

work better in dealing with the risks in the housing market.

     "The adoption of positive credit reporting, which APRA strongly endorses,

will remove a blind spot in a lender's ability to see a borrower's leverage.

Coupled with the higher and more risk-sensitive capital requirements that I

mentioned earlier, these developments should - all else being equal - provide an

environment in which some of our benchmarks are no longer needed," APRA chairman

Byres said in his speech Monday.

     BACKGROUND

     New measures by APRA announced in March included a focus on interest-only

mortgages, with APRA advising banks to limit them to 30% of total new mortgage

lending. Within that boundary, banks were asked to ensure strict internal limits

on the volume of interest-only lending that have loan-to-value ratios (LVR)

above 80%. The APRA retained the 10% limit on interest-only loans as a

proportion of a bank's total mortgage lending that has been in place since 2015.

     APRA said back then that it would adjust the measures or implement

additional ones, as needed.

     In his speech Monday, Byres said the quality of lending has improved and

risk standards have strengthened, and APRA would like to scale back its

quantitative benchmarks and eventually remove them. But before doing so, it

wants to feel comfortable that the industry's loan serviceability standards have

improved sufficiently and will be sustained, and that household debt-to-income

levels remain appropriate in preparation for the eventual rise in interest

rates, he added.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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