Yesterday afternoon news confirmed that the Australian Prudential Regulation Authority (APRA) is not about to impose new macroprudential measures on property financing in Australia.

ABC reports – APRA said instead it would said it will increase supervision of home lending

  • APRA … will look very closely at any institutions where investment housing loans are growing faster than 10 per cent per annum
  • Its asking lenders to ensure that they use an interest rate buffer at least 2 percentage points above current rates when testing whether a potential customer can afford to service their loan
  • Said the serviceability test should use a minimum interest rate floor of 7 per cent to ensure that borrowers can keep repaying their loan when rates rise
  • Will monitor for evidence of excessive higher-risk mortgage lending, such as high loan-to-value ratios, high loan-to-income ratios, interest-only loans to owner-occupiers and very long term home loans
  • APRA’s chairman Wayne Byres said many lenders are already complying with these standards, but if it is found that enough are not, then system-wide action is still an option

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A few months ago it was widely expected that new macroprudential tools would be introduced before the end of the year. Doing so would target specific sectors of the housing & housing finance market and would have the effect of lessening the need for interest rate hikes in Australia (that’s the simplified version).

For example, the New Zealand experience (the Reserve Bank of New Zealand introduced temporary restrictions on high loan-to-value ratio (LVR) residential mortgage lending in October of 2013) has been credited with allowing a delay in rate tightening, according to RBNZ Governor Wheeler, at least.

In more recent months, though, the guidance from APRA has been that these tools would not be implemented soon:

  • APRA head Wayne Bryes said in October to an upper house of parliament committee that the organisation was “not yet decided” on actions to take
  • Saying again just a couple of weeks ago that the “tools not time critical … more important to get the decision right”
  • Even as far back as September economists were doubtful

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The impact of the APRA (lack of) decision will be to hasten the interest rate rise cycle in Australia. Not that there is any pressure of a rise on the near-term horizon, inflation is subdued (and about to get more so in the next inflation report) and the economy is growing below trend.