Why a return to lending limits cannot be ruled out in a red hot housing market

Top bank economists are warning about so-called macroprudential regulations which could be imposed on the property market if investment lending continues at breakneck pace.

The last time prudential regulator APRA used macroprudential tools to cool the market was back in 2017. Picture: Nadir Kinani/NewsWire

Lending limits could put a sudden stop to a new wave of investment rushing into the residential market as prices bounce, especially at the first-home buyer level.

After a surprise inflation spike cut dead expectations of any further interest rate cuts, the property market is now facing the distinct risk of investor lending limits as an alternative to the more blunt move of the Reserve Bank lifting the cash rate.

So-called macroprudential tools aimed at cooling investor loans have been missing from the property market since 2018, but the concept – which would see regulators cool the market through caps on products such as interest-only loans – has been raised once more in a new note from National Australia Bank.

In reframing its forecast to dump any prediction of further rate cuts, the NAB economics team – led by group chief economist Sally Auld – spelled out the dramatic pace of recent investment lending.

“Historically growth rates of these magnitudes would demand a policy response, macroprudential or otherwise.” the NAB team said.

NAB detailed what it called a sharp rise in investor loans with the value of those loans up 18 per cent in the three months to the end of September.

The last time prudential regulator APRA used macroprudential tools to cool the market was back in 2017 when it dictated to the banks that interest-only loans could be no more than 30 per cent of new lending. The rules stayed in place for more than a year and cooled demand inside housing.

The latest rise in investment lending to the housing market coincided with the federal government’s expanded 5 per cent home deposit scheme, which provides the facility for people to buy their first home on a 95 per cent mortgage.

Anticipation of the universal deposit scheme’s impact has already taken effect with monthly prices of first-time buyer homes rising faster than the wider market, according to Cotality.

Not everyone agrees that lending limits loom under the current set of conditions, including the CBA economics team.

“The RBA has recently flagged a sharp rise in investor activity as a risk to financial stability. Third quarter data will likely add to their concern, but we don’t think the threshold for macroprudential has been reached,” the CBA economists said.

HSBC Australia chief economist Paul Bloxham – one of the first economists to suggest the next move in rates will be higher – said the regulators would likely wait before acting.

“I don’t think you can rule out macroprudential moves ahead, but I expect the regulators will wait and hope the message that rates are not going anywhere for some time will gradually slow momentum in the housing market,” he said.

Anissa Cavallo of the Eda Property told The Australian’s The Money Puzzle podcast: “Using macroprudential tools such as lending caps is an easy move.

“It’s more a case of risk mitigation because the banks can have too much risk on their balance sheets. Sometimes if we get these huge investment flows they might need to be introduced.”