Macroprudential policies to cool housing market reduced risk: RBA
Australia’s macroprudential policies targeting the housing market between 2014 and 2018 contributed to a reduction in risk in the financial system.
Australia’s macroprudential policies targeting the housing market between 2014 and 2018 contributed to a reduction in risk in the financial system, according to the Reserve Bank.
In a paper titled Macroprudential Limits on Mortgage Products: The Australian Experience, Reserve Bank researchers analysed lending and interest rate data from the 28 largest Australian banks to determine if the lending limits applied by the Australian Prudential Regulation Authority succeeded in curbing the targeted types of lending, as well any other effects.
The first policy, in late 2014, required banks to limit their annual growth in investor mortgages to no more than 10 per cent.
The second policy, in early 2017, required banks to limit their lending in interest-only mortgages to no more than 30 per cent of their total new housing lending.
APRA subsequently removed the limits when it believed there had been sufficient improvement in lending standards and the identified risks had subsided.
“These policies were aimed at risks that were building in speculative components of the mortgage market, which, at the time, were seen to have the potential to amplify housing market dynamics and economic fluctuations,” the RBA researchers noted.
They found that large and mid-sized lenders reacted differently to APRA’s policies.
“For example, when financial institutions cut interest-only lending, large banks increased their principal and interest lending, while mid-sized banks did not,” they said.
There was also “some effect” on competition among the 28 banks analysed, albeit “short lived”.
Furthermore, while the policies didn’t slow aggregate mortgage growth, they slowed growth in targeted mortgage types, and there were “signs of a positive effect on business credit”.
Because of their novelty in Australia, the policies brought “unique challenges” for banks and regulators, such that there was a lag of two quarters between when the investor policy was announced in 2014 and when it began to have a significant effect.
The delay was found to have been due to “different interpretations of credit growth limits and because banks’ systems were not initially capable of targeting particular components of their mortgage portfolios”. However, the challenges had largely been overcome by the time of the interest-only policy, which had an immediate effect, the researchers said.
The paper said that macroprudential credit growth limits were “backed by a deep literature tying credit growth to financial crises” and research showed that “excessive credit growth is the most consistent antecedent of financial crises”.
But while a variety of macroprudential tools have been implemented to curb excessive or risky credit, including many specifically targeting mortgage lending, “to our knowledge, none of these policies have targeted overall growth in particular mortgage products, aside from APRA’s”.
“Most policies in other countries have set quantitative requirements only on loans above specific loan-to-valuation ratios (LVRs) or loan-to-income ratios (LTIs),” the researchers said.
They said that while APRA gave guidance that banks should manage new lending at high LVRs and LTIs, quantitative limits were only set for the specific mortgage products because high LVR lending was already in decline, limits on high LVR loans could disproportionately affect first-home buyers, and the main risks appeared concentrated in speculative and interest-only borrowing.
Potentially supporting the use of such policies later this year to cool risky home lending, as many economists expect, they concluded that the macroprudential tools deployed in Australia achieved their broad aim to “manage systemic risk in the financial sector”.
“Our results show that despite some initial difficulties and unexpected effects, banks reacted by reducing growth in risky types of lending targeted by the regulator,” the researchers said.
“As such, our results suggest that these macroprudential policies achieved their stated aims and contributed to a reduction in risk in the financial system.”
It came as NAB raised its outlook for Australian home price growth in 2021 to 19 per cent while slightly lowering its 2022 forecast to 4 per cent. Sydney’s forecast was lifted to 21 per cent.
“Faster than expected outcomes in recent months see a higher starting base, and while we see a slowing in the monthly pace of growth from here, we still see solid growth over the next six months,” said NAB economists led by Alan Oster.
“Affordability constraints will likely begin to bind over the year and see a slowing in price growth as the impact of lower rates fades,” they said.
ANZ senior economist Felicity Emmett said that “prior to 2014 the RBA was very circumspect about the effectiveness of macro prudential controls; this really shows it is a good thing to have as part of their overall policy tool kit”.
But Ms Emmett said in the current housing upswing there was “not really a problem” with interest-only mortgages or investor lending, which was rising rapidly, but from a very low level.
Instead, “the issue for the RBA is overall credit growth, and particularly if that were to grow faster than household income for an extended period”.
And monetary policymakers were more concerned about how surging household debt levels could eventually weigh on household consumption, Ms Emmett said.
“It’s more about macroeconomic stability, rather than banking stability,” she said.
With the economy now expected to contract in the September quarter as a result of lockdowns in NSW, Victoria and South Australia, Ms Emmett said regulators might be unwilling to take action to curb lending.
“The last thing the RBA and APRA would want to do is unduly slow the housing market and find that that flows into macroeconomic weakness,” Ms Emmett.
“They will be very careful.”
Additional Reporting: Patrick Commins
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