There was a touch of that famous line from The Castle about Wayne Byres’ comments on when the prudential regulator might need to do more to cool Australia’s white-hot housing market.
There’s no fixed rules, it’s more about “the vibe of the thing”.
The Australian Prudential Regulation Authority chairman told the UBS Australasia conference on Monday that the recent decision to tell banks to lift home loan serviceability buffers from 2.5 per cent to at least 3 per cent was less about the risk the banks themselves were taking on and more about the risks building in the broader economy.
“We think bank lending standards on the whole have held up quite well. But the broader environment is nonetheless one which creates dangers of very high levels of leverage,” Byres said.
“The problem was, potentially we had strong incentives to take on higher leverage at a time when the household sector is already highly liquid.
“And the step we took can simply be thought about as … buying a little bit more insurance, if you like, that borrowers will not be over-extending themselves, particularly if we are moving sooner than expected into a cycle where interest rates start to rise.”
Notably, Byres called out first home buyers as a particular concern, saying APRA was keen to ensure buyers entering the market were not overly leveraged to a rate cycle that will eventually start to move higher – and perhaps sooner rather than later.
A double-edged sword
Indeed, financial markets are betting central banks will lift rates next year, despite protestations from the Reserve Bank of Australia and the US Federal Reserve that they will wait until they see sustained inflation and strong employment before raising rates.
Any rate increases would be a double-edged sword for APRA and the Council of Financial Regulators.
On the one hand, they would put a little more pressure on indebted households, although Byres’ faith in lending standards would tend to indicate he thinks most borrowers have a suitable buffer.
On the other hand, rate rises could help ease APRA’s mind.
“If we went into an environment where interest rates started to increase, then maybe there’s actually no more work for us to do because there’ll be a natural increase in interest rates which will, by itself, start to slow down the very high levels of new loans-to-income that are flowing through the system,” he said.
Last week, Chanticleer and fellow columnist at The Australian Financial Review, Chris Joye, wrote about how the banks could help the RBA delay rate rises if rising funding costs force them to lift mortgage rates ahead of an official interest rate increase.
Byres would find himself in a similar position; the cooling effect of (slightly) higher rates might do just enough to take the heat out of the housing market.
“We’re not targeting house prices. We’re trying to think about the macro environment. House prices for us are a risk factor, rather than a target,” he said.
Of course, there is a possibility that credit growth further accelerates, and Byres says APRA may be prepared to do more.
But he stresses this decision will not come down to some sort of formula – this level of credit growth or house price growth equals this response.
“Now, I know that it’s frustrating because you’re looking for the rules,” Byres said, adding the regulator’s approach would be more about “listening to different views of risks, understanding how the different agencies see the world, and then thinking about what’s the problem, how important is the problem, and if we want to do something about it, what’s the best tool to use?”
APRA’s tools are likely to get more sophisticated. In its paper on macroprudential policy changes released last week, APRA stressed it wants banks to get systems in place to allow the regulator to limit lending on the basis of debt-to-income ratios, after a record 22 per cent of loans written in the June quarter were at more than six times a borrower’s income.
“We need the industry to make sure that if we do go to the toolkit and pull those two tools out, that we can implement them,” Byres says.
(Fin Review – Nov 21)
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