APRA lifts interest rate buffer amid housing market heat

The regulator has sharply lifted the interest rate buffer it expects banks to use when assessing home loan applications, CBA warns of further moves to come.

Property prices in Vaucluse, on the Eastern Suburbs in Sydney Australia, have soared during the pandemic. Picture: NCA NewsWire / Gaye Gerard

The financial regulator has fired the first shot in efforts to cool the nation’s overheated housing market, with banks already bracing for further moves to tighten lending in the months ahead.

The Australian Prudential Regulation Authority ordering banks to be more cautious when assessing home loans in a move that could cut the maximum borrowing capacity as well as reduce the level of discounting offered to new borrowers.

APRA told banks to lift the interest rate buffer they use when assessing home loans to at least 3 per cent above the loan product rate, up from the current 2.5 per cent commonly used by the banks and credit unions.

The move will make it tougher for over-committed borrowers to take out a loan, while those who have already received pre-approval are now in limbo as the banks scramble to work out how to apply the changes.

It comes after house prices surged 20 per cent over the past year, marking the fastest growth rate since June 1989, with expectations of further rises in 2022.

The decision to tighten macro prudential policy “reflects growing financial stability risks from ADIs’ residential mortgage lending” and was supported by other members of the Council of Financial Regulators, APRA said.

“More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income, and at an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead,” APRA chairman Wayne Byres said.

“With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted.”

Josh Frydenberg backed APRA’s decision, calling it a “targeted and prudent step … to prevent the build-up of future risks in the financial system”.

But the nation’s biggest bank, Commonwealth Bank, warned of the potential need for further action in the months ahead as NSW and Victoria emerge from lockdown and consumer confidence bounces back.

“We believe that APRA’s announcement to increase the serviceability floor is a sensible and appropriate step to help take some of the heat out of the housing market,” CBA CEO Matt Comyn said.

“Having increased our floor to 5.25 per cent in June, we think this further step will provide additional comfort for borrowers and is a prudent measure for lenders.

“We will implement the changes this month and expect that it may be necessary to consider additional steps as lockdowns end and consumer confidence increases,” he warned.

CBA CEO Matt Comyn. Picture: Adam Yip

The new rules hit bank share prices through Wednesday’s session, with CBA - which has the nation’s biggest mortgage book – down 2 per cent to $103.42. Of the other majors, ANZ fell 1.1 per cent, Westpac dropped 0.6 per cent and NAB lost 0.8 per cent.

ANZ head of Australian economics David Plank also flagged further macroprudential tightening was “more likely than not”, while Jefferies banking analyst Brian Johnson warned “this is just the beginning” as he called for the stress test rates to move even higher.

“It’s a relatively small move, and I think ultimately those stressed rates need to move from 5 to 7 per cent,” Mr Johnson said.

“The longer you wait the more people you’ve got coming in that become very vulnerable to any rise in interest rates.”

The 50 basis points increase in the serviceability buffer, to 3 per cent, will reduce maximum borrowing capacity for the typical borrower by around 5 per cent, APRA said.

This would drop the average family’s maximum borrowing capacity by $35,000, while a single person on an average income will be able to borrow $28,500 less under the new rules, according to RateCity.

Housing credit growth will slow as a result of the higher rate buffer, Mr Johnson predicted, as he pointed to a second impact of APRA’s move: “To the extent that we take away the churn rate in housing credit, I think it embeds the housing market share gains that CBA has made and embeds the market share losses ANZ and Westpac have made,” he said.

“So it will reduce the opportunity for banks to grab market share off each other while embedding the transfer of shareholder value from ANZ and Westpac to CBA.

Westpac’s chief executive for consumer and business banking, Chris de Bruin, said APRA’s decision was “a sensible approach in the current environment”.

“Westpac is committed to maintaining disciplined lending standards and will implement the change in line with APRA direction,” Mr de Bruin said.

“We also note that APRA will continue to monitor non-ADI lending which is important for the health of the overall system.”

Suncorp chief executive Steve Johnston said he welcomed efforts by the regulator to tighten lending rules, but that it would not impact on his bank‘s operations.

“It is a pragmatic approach to what is happening in the property market,” Mr Johnston said on the sidelines of the QUT Business Leaders Forum in Brisbane.

It would not impact the bank because Suncorp always had a buffer built into its loan approvals meaning customers could manage increases in rates, he added.

He said he had been left ”scratching his head” about property market increases in some areas of the country, noting that the average mortgage in Sydney had doubled in the last five years to $700,000 while in Brisbane it was approaching $450,000.

“You have to ask if that is sustainable,” said Mr Johnston, a former government policy advisor before he became a banker.

The move from APRA comes after the RBA on Tuesday dialled up its warning on the importance of prudent home lending standards as it keeps interest rates at record lows and continues buying government bonds to ensure there’s enough stimulus in place to get the economy back on track once coronavirus restrictions are eased.

The RBA will release its semi-annual Financial Stability Review on Friday.

ANZ CEO Shayne Elliott earlier this week backed measures to cool the hopping housing market.

“It‘s probably a reasonably good idea,” Mr Elliott said on Monday ahead of the moves.

“Whenever markets move quickly up or down, it’s always a time for concern. And what we’re seeing is house prices accelerating quite strongly … you’ve seen the numbers 20-odd per cent across the country this year and people forecasting even more increases next year, not at that same level.”

APRA on Wednesday predicted the overall impact of the higher buffer on aggregate housing credit growth would be fairly modest and flagged the potential for further lending curbs.

“Together with other members of the (Council of Financial Regulators), APRA will continue to closely monitor risks in residential mortgage lending, and can take further steps if necessary,” APRA said.

The new rules would have little impact on house price momentum, Citi’s Brendan Sproules warned.

“Without a change in credit growth, we see little reason (outside of increasing affordability issues) for why house price momentum should slow. As a result, there will likely be calls for further intervention in time,” he said.

“Today’s change will have little impact on the banks, but could represent a better than anticipated outcome in the short term given fears of more draconian intervention”.

First-home buyers would be hit hardest by the move, economist Saul Eslake warned.

“First home buyers are the ones who have to stretch themselves the most to get into the housing market. So this move is better than controls on debt-to-income or loan-to-value ratios, but it would have been even better to limit loans to investors, as they have in the past,” he said.

“This is a measure that will hurt marginal first-home buyers. And while marginal first-home buyers are a source of risk, they wouldn’t have to stretch themselves so much if there weren’t so many investors in the market.”

Morningstar analyst Nathan Zaia said it was a positive that the regulator had taken a step to slow down the market but predicted that the new buffer would have only “a minute effect” on lending, with most home buyers already shirking away from borrowing up to their capacity.

But HSBC chief economist Paul Bloxham said the higher buffer would be a contributing factor to a cooling in the housing market in the coming months.

“We’re expecting that house price growth will cool down running into 2022, from the double-digit rates this year to single digits next year.

“The additional supply in the market (as lockdowns ease) at the same time as weaker demand from the stalled population growth will also contribute,” he predicted.

Additional reporting: Glen Norris, Patrick Commins