RBA set to double down on property loans

The RBA has given its strongest indication that fresh macroprudential lending limits on banks are brewing.

The Reserve Bank has given a strong indication of fresh macroprudential lending limits on banks.

The Reserve Bank has given its strongest indication yet of fresh macroprudential measures to tighten bank lending, providing room to keep interest rates low while also addressing renewed risks around resurgent house price growth and investor borrowing.

Strengthening bets that the banks are staring down more lending curbs, RBA assistant governor Michele Bullock yesterday said the nation’s top regulatory bodies were “prepared to do more if needed” to build resilience in case “things turn down”.

Economists said the comments suggested tighter policies were ­inevitable, building on the Australian Prudential Regulation Authority’s 2014 cap on investment lending.

“We’ve seen things pick up again and that’s why we’re watching it (investor lending) very carefully and considering whether we might need to do more,” Ms Bullock told a Bloomberg event in Sydney after her first speech.

“We are watching it because investors can be the first ones to get out if things turn down.”

Ms Bullock said a recent meeting by the Council of Financial Regulators — which included a rare attendance from Scott Morrison — discussed macroprudential tools amid revelations that some banks, including the Commonwealth Bank, had neared APRA’s 10 per cent annual growth cap on investor lending.

“It’s always on the table. Are there things APRA can be doing? What is APRA seeing about the risks that individual financial institutions are taking?” she said.

CBA this week further tightened lending policies by slicing its investor loan-to-value ratio limit to 90 per cent, meaning buyers need a 10 per cent deposit.

While not commenting on whether the market was in a ­bubble, Ms Bullock said a major concern was buyers “chasing” price rises, resulting in the fallout for banks and consumers being “much bigger than it otherwise will be”.

JPMorgan economist Ben Jarman said fresh macroprudential limits appeared the “only path out for the RBA” amid rising financial stability risks, low income growth and the hit to heavily indebted borrowers of raising the official cash rate from record lows.

“With the saving rate buffer diminished, the cycle is now even more fragile, as risks around the inflation/financial stability trade-off become harder to mitigate,” Mr Jarman said. “The only feasible way to reconcile the two is more macroprudential tightening, focused on lending criteria.”

While APRA has been tight-lipped on options, Citi’s analysts said the regulator may introduce debt service caps or force banks to factor in interest rates 3 per cent above actual rates when assessing borrowers, stricter than the current 2 per cent buffer. APRA could also apply higher discounts to borrowers’ non-salary income in serviceability assessments, Citi added, noting Australia’s ratio of debt to disposable income was a record high 180 per cent.

Ms Bullock said her priority was working out “how best to respond” to rising financial stability risks, arguing “it’s not credit we’re aiming at (and) it’s not housing prices ... we’re interested in resilience of financial institutions and ... household balance sheets”.

“What individual banks do might look OK, but when you group all the banks together as a system sometimes all of them doing a similar thing can have a very dramatic effect,” Ms Bullock said. “So what we’re really focusing on is to what extent are things like the growth in house prices, the growth in debt, what are they signalling about whether or not households have balance sheets that can withstand a downturn, whether it be due to unemployment … or a downturn in the economy for some reason.”

CoreLogic this month said Sydney house prices had risen 18.4 per cent in the past year — the fastest growth since 2002 — up 75 per cent since the RBA began cutting rates in late 2011. Melbourne has also had double-digit annual growth.

“Regulators have not done enough to tame housing credit growth, conflicted as they are between seeing housing momentum as a replacement for the fading mining boom on one side, and the risks to households, their high levels of debt, and broader ­financial stability on the other,” said Digital Finance Analytics principal Martin North.

Ms Bullock said while APRA’s 10 per cent cap on investor lending worked to cool borrowing initially, growth had recently sped up again.

RBA data shows annual system-wide investor lending has picked up to 6.6 per cent after bottoming in August at 4.6 per cent. APRA has also indicated that banks are approaching the 10 per cent cap, spurring CBA to lift investor borrowing rates.

“There is no doubt the actions did address some of the risks,” Ms Bullock said, adding APRA and the corporate regulator had also increased scrutiny of lending practices. “Nevertheless, the early experience suggests that, while the resilience of both borrowers and lenders has no doubt improved, the initial effects on credit and some other indicators we use to assess risk may fade over time.”

While east coast capital city prices have soared, Perth values fell 5 per cent in the past year and regional areas dived even more.

Ms Bullock noted the different price moves across the country, and for apartments and detached housing, arguing APRA could force banks to assess lending on a more “regional basis” and this was happening. Despite fears of an apartment glut, she argued the RBA had not witnessed a material rise in settlement failures and the market was more influenced by domestic buyers than any drying up of demand from foreigners.

APRA chairman Wayne Byres this month said many countries had used macroprudential tools to control property market risks.