After APRA’s move, RBA rate cuts will now have an impact

The Australian Prudential Regulation Authority’s Wayne Byres. Pic: AAP

With one letter APRA boss Wayne Byres has negated the need for Prime Minister Scott Morrison’s lunatic first home buyers plan and smoothed the way for any interest rate cuts to have some impact.

The regulator’s letter to banks gives them discretion to impose a lower threshold on home loans from the existing seven per cent test, which is some 300 basis points above a standard four per cent home loan rate.

A new buffer of 2.5 per cent above the bank’s lending rate is suggested, which means if the RBA cuts rates then the buffer could be applied to lower rates.

NAB economist Alan Oster is expecting the Reserve Bank to cut rates from 1.5 per cent twice this year, starting next month .

If the APRA limit had remained, the RBA move would have had zero effect because the banks would have been required to test all new home loans at a seven per cent threshold.

That means they would assess loans on the borrower’s ability to repay loans at a seven per cent interest rate.

Westpac’s standard variable rate for loans above $500,000 is 5.38 per cent which is the highest of the big banks, with NAB and ANZ on 5.36 per cent.

Morrison announced during the election campaign he would look at introducing government guarantees to help some first home buyers into their first home.

While any bank would welcome government guarantees the concept of more intervention in the market is an anathema to most bankers, particularly given the government’s efforts to make life harder for the banks through, among other reasons, the bank levy.

The point being if the government lifted the regulations on banks then maybe they could lend more money, rather than throwing new interventions into the pile to complicate the matter further.

Morrison will probably want to take the matter further, just so the concept won’t look like an election thought bubble.

There are other reasons for the problems faced by first home buyers, including available supply.

The good news is APRA’s Byres has taken a useful step in negating a need for more intervention and offering some help to a slowing credit market.