The impact of macro-prudential policies on the housing market
Credit standards remain cautious, but higher levels of household debt or a further increase in the high debt-to-income ratio could trigger a tightening of term credit conditions.
The emphasis on home credit policies is becoming more intense as property values continue to rise and mortgage debt levels rise faster than their long-term averages.
It’s rare for the RBA to make a statement these days without including a sentence about the importance of maintaining lending standards for home loans. The central bank’s latest statement following its September board meeting was no different and included the following line: “Given the environment of rising house prices and interest rates, low interest, the Bank carefully monitors mortgage trends and it is important that lending standards are maintained. “
Any tightening of credit policies would likely have an immediate dampening effect on housing markets, the extent of which would depend on the extent and severity of the tightening in credit conditions. Thanks to previous rounds of macroprudential policies and the Royal Banking Commission, which saw mortgage more difficult to obtain, the impact on real estate activity and value growth was clear.
The first cycle of macroprudential policy intervention (announced in December 2014), which implied a 10% speed limit on annual growth in investor credit, only had an impact in mid-2015 due to of the consultative approach adopted by APRA. By May 2015, the growth rate of home values had started to decline, going into negative territory between November 2015 and April 2016.
The second round of macro-prudential policy announcements took place in March 2017, which involved a 30% benchmark on the flow of new interest-only mortgage loans. The impact of this policy was more immediate, resulting in a marked slowdown in the pace of home value appreciation from the date of implementation. As a result, the value of national houses declined between late 2017 and early 2018.
Credit policy and home loan viability ratings were tightened through the Royal Banking Commission, and home values again reacted negatively.
During each of these periods of credit crunch, the impact on real estate trends was most evident in markets that had increased exposure to the rules. Sydney, for example, was the epicenter of investment activity, with investors accounting for nearly 56% of mortgage demand at the start of 2015. As a result, home values in Sydney fell more sharply than the national average during each of these credit policy adjustment periods.
In the current environment, the risk of a credit crunch is likely to be more focused on the aggregate accumulation of debt in the household sector rather than on investment loans or interest-only loans.
The speed of net investment credit growth (i.e. new loans minus repaid debt) has increased, but remains below average, and has in fact tended to decline over the past two months. July, reflecting an appetite for debt reduction in the investment sector. On the other hand, homeowner credit growth has been trending upward since June 2020 and has remained above the decade average since November of last year.
Another warning sign is the proportion of loans issued with high debt-to-income ratios. The latest APRA data shows that home loans from a debt-to-income ratio above six times accounted for almost 22% of loans in the June quarter; a substantial increase from a year ago, when only 16.0% of new loans had such a high debt-to-income ratio.
Other APRA measures for the June quarter were less cautious. Interest-only loans fell to just 17.2% of home loans and mortgages with a loan-to-appraisal ratio of 90% or more (i.e. buyers who had a deposit of 10% or less) tend to decline since December to include only 8.6% of new loans in the June quarter.
As the governor of the RBA pointed out in his testimony to the House of Representatives Standing Committee on Economics last month, the attention of the Board of Financial Regulators, which includes the RBA as well as the APRA, l ‘ASIC and the Federal Treasury, is strongly focused on sustainability trends. in household borrowing. A prolonged period in which household debt grows faster than income implies an accumulation of medium-term risks that could trigger a tightening of credit policy.
Household debt data is current through March 2021 and will be updated later this month. The trend shows a subtle reduction in household debt levels since the recent peaks in mid-2019. However, the ratio of household debt to annualized household disposable income edged up in March and likely rose further. Likewise, the real estate debt and household debt ratios have also declined, but have recently increased slightly. Given the pace of growth in housing credit in a context of weak income growth, in all likelihood, household debt (of which housing debt is the main component) will reach or approach a record level of ‘by the end of 2021.
The likely response to these medium-term risks could be seen in higher ratings of ease of service for borrowers – essentially increasing the minimum interest rate used to assess whether a borrower can repay their loan, or restrictions on borrowers. portfolio level could be imposed on lenders, probably focused on establishing firm benchmarks on the proportion of high debt-to-income ratio loans that can be issued.
Either of these options would impact the availability of credit and limit the loan amount relative to the borrower’s income or service capacity. Ultimately, stricter credit terms, if introduced, would result in a decrease in home buying activity and add to the headwinds of deteriorating housing affordability, from higher levels. the supply of new constructions and the cessation of migrations abroad.
Of course, the tailwind of persistently low mortgage rates and improving economic conditions once lockdowns are eased or lifted will help keep housing demand bottoming out. The RBA reiterated in its latest statement following the September board meeting that it still expects the cash rate to remain unchanged until 2024 at the earliest.