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The chair of the prudential regulator is closely monitoring developments in the housing market, particularly the rise in “speculation”, amid financial stability concerns associated with the rebound in activity.
Appearing before the Senate estimates committee late last month, chair of the Australian Prudential Regulation Authority (APRA) Wayne Byres reassured policymakers that the regulator’s previous interventions in the home lending space had reduced stability risks.
APRA had previously introduced caps on interest-only and investor lending growth and had also set a 7 per cent interest rate floor for mortgage serviceability assessments. Such measures have since been removed.
“APRA has worked extensively over the past five years to re-establish sound lending standards after an earlier period in which they had been eroded due to strong competitive pressures,” Mr Byres told policymakers.
“While not declaring victory, we have been able to step back and materially reduce the extent of intervention in this area over the past year as sound lending standards became embedded across the industry.”
However, Mr Byres said that despite the regulator’s decision to ease its lending guidance over the past year, it would carefully monitor developments in the market in light of the recent rebound in activity, partly triggered by the Reserve Bank of Australia’s (RBA) cuts to the cash rate.
Mr Byres made particular reference to the spike in investor borrowing, with the value of investor lending rising by a cumulative 10.3 per cent over the past two months.
“[The] housing market remains an area we are watching closely, particularly given record-low interest rates, already high household debt, and signs of some revival in borrowing for speculative purposes,” Mr Byres added.
According to ANZ Research economists Adelaide Timbrell and Catherine Birch, the pick-up in investor activity could raise alarm bells for the RBA.
The economists claimed that the spike in investor demand could be viewed by the RBA as a threat to financial stability, with the accumulation of mortgage debt compounding risks associated with high household indebtedness.
“This supports concerns that the RBA’s rate cuts are flowing through more intensely into housing compared with other key parts of the economy, including household consumption and businesses,” the economists noted in a report.
“While we believe we’re currently seeing a pop rather than the beginning of a V-shaped recovery in the housing market, the increases in prices and mortgage demand are likely to be a concern for the RBA, particularly given record-high household debt.”
Some observers, including executive director of economic research at REA Group Cameron Kusher, have warned that a sharper than anticipated spike in credit activity could spark a new wave of macro-prudential curbs from APRA.
However, Mr Kusher said that prospective lending curbs would not resemble APRA’s previous measures and touted the possibility of lending caps for borrowers with high debt-to-income ratios.
The analyst said he expects macro-prudential policy to continue to play a role in the lending space, noting that the “effectiveness” of previous curbs has set a precedent for future regulatory action.