Commonwealth Bank calls for ‘modest’ moves to temper housing boom

Commonwealth Bank has split from the banking pack by calling for the implementation of ‘modest’ measures to rein in the housing boom.

‘It’s much harder to act when the market is accelerating,’ says Commonwealth Bank CEO Matt Comyn.

Commonwealth Bank has split from the banking pack by calling for the implementation of “modest” measures to rein in the housing boom, saying it is “increasingly concerned” about the prospect of mortgage stress.

Appearing before the House economics committee on Thursday, CBA chief executive Mr Comyn said he was not particularly concerned about the current state of the market.

However, it was prudent to take proactive regulatory action “sooner rather than later” to avoid harsher measures in the future, like those taken in New Zealand.

“If we look at the simple numbers and the relative growth rate of housing over the last 12 months, I am not concerned per se about the period just gone,” Mr Comyn said.

“But in terms of increasing housing debt and increasing house prices, we are increasingly concerned.

“We think it would be important to take some modest steps sooner rather than later to take some of the heat out of the housing market.”

Appearing before the same committee, ANZ Bank chief executive Shayne Elliott said the bank had also been concerned about the level of household debt.

But Mr Elliott said it was important to understand with a “high degree of clarity” the precise problem that the measures were designed to address.

CBA is the first of the major banks to make the call for macroprudential measures to restore some stability to the runaway housing market, where prices are expected to lift by about 20 per cent this year before moderating in 2022.

The core of the bank’s concern was the likelihood of housing credit growth outstripping the outlook for wages growth, with Mr Comyn commenting that it was much harder to act when the market was accelerating.

With interest rates currently at record lows, borrowers could take on too much debt, creating elevated stress if rates were to spike.

Any associated impact on consumption levels could have adverse implications for the wider economy.

Mr Comyn said the strength of the market was different to the investor and interest-only booms, which led to the introduction of macroprudential speed limits in 2014 and 2017.

The most appropriate regulatory action this time around was to limit borrowing capacity by raising the banks’ serviceability floor, which measures a customer’s capacity to make repayments in a higher rate environment.

The problem, according to the CBA chief, was more macro than prudential, because there was no evidence of a widespread decline in lending standards.

“The bigger concern is the resilience of borrowers in a much higher interest-rate environment,” Mr Comyn said.

“An increase in the (floor servicing rate) is very easy to implement and could apply to non-banks as well as banks.

“From a policy perspective it affects all borrowers equally.

“It does affect people at the maximum of their borrowing capacity but I don’t think there is a perfect policy measure, otherwise we would have deployed it.”

Mr Comyn said he had a regular dialogue with the Reserve Bank and the Australian Prudential Regulation Authority about such issues.

One of the surprises of the lockdowns in NSW and Victoria, he said, was the resilience of the housing market, with no evidence of a material slowdown in loan applications as recently as the last week.

Reserve Bank assistant governor Michele Bullock said in a speech on Wednesday that risks to financial stability “could be building” with the increase in house prices and housing debt.

“A high level of debt could pose risks to the economy in the event of a shock to household incomes or a sharp decline in housing prices,” Ms Bullock said.

“It is these macro-financial risks that warrant close watching – whether or not there is a need to consider macro-prudential tools to address these risks is something we are continually assessing.”

The assistant governor’s assessment followed the release of Australian Prudential Regulation Authority data earlier this month, which showed a spike in riskier home lending.

In the June quarter, 21.9 per cent of new home loans had a worrying level of debt at least six times greater than income, up from only 16.3 per cent in the September quarter last year.

Ms Bullock said growth in housing credit was running at an annualised rate of 7 per cent and could peak early next year at about 11 per cent.

If the intention was to slow the rate of housing price growth, Mr Elliott said a different set of macroprudential measures was needed.

“In New Zealand, where there was concern over house prices, they implemented some restrictions on the loan to valuation ratio for investors because there was a theory that investors were having an undue impact on prices,” he said.

“So I think it’s about trying to understand the problem and then there will be a range of tools, but whatever tool you choose there’s always going to be winners and losers because, by definition you’re trying to have an impact on some part of the market.

“Our concern in general is that they put first home buyers at a disadvantage. They can also have an impact on the competitive landscape by entrenching positions.”