Mortgage crackdown not likely to slow house price growth

New lending restrictions have been criticised as missing the mark, with experts saying tougher home loan tests may not curb house price growth as intended.

The Australian Prudential Regulation Authority wrote to lenders this week instructing them to impose stricter criteria on whether borrowers could service a home loan in a higher interest rate environment, in an effort to slow the runaway house price growth occurring across the country.

For the 12 months to the end of September, data from CoreLogic shows national median house prices have gained 20.4 per cent in value, with affordability becoming a rising concern as many aspiring buyers get priced out of the market.

APRA’s new restrictions, however, are not likely to have the desired effect of slowing price growth, according to Real Estate Institute of New South Wales chief executive Tim McKibbin.

“The only way to solve this problem is supply - we just need more property and that’s the only thing,” Mr McKibbin told Australian Property Investor Magazine.

"They have complicated things with a litany of irrelevant considerations.

“If you are only moving the comfort level from 2.5 per cent to 3 per cent, that isn’t going to slow things down a lot. I really can’t see it having much of an impact, to be frank.”

Mr McKibbin said REINSW had long held a view that borrowers should not stretch to their absolute limit, a consideration that had become all the more pertinent over the pandemic.

“We’re not opposed to APRA putting that in, but I don’t know that APRA has done it to stop risky lending, they’ve put that in to cool the market, and I can’t see that having much of an effect,” he said.

“The banks shouldn’t be lending to people at the top of their borrowing capacity anyway. That shouldn’t be happening.”

CoreLogic head of Australian research Eliza Owen also expressed doubts that increasing the serviceability buffer from 2.5 per cent to 3 per cent would have the desired effect.

Ms Owen said the impacts would likely only be felt at the margins of borrowing demand, pointing to APRA estimates that the typical maximum borrowing capacity would only be reduced by around 5 per cent.

“While APRA’s announcement may seem like it won’t have much impact on demand for credit, it is worth noting that this may not be the end of macroprudential changes,” Ms Owen said.

“A lot of focus has also been on high ‘debt-to-income’ ratios - a statistic expressing a borrower’s pre-tax income divided by their total debt levels.

“In his letter to lenders, APRA chair Wayne Byres flagged that if new mortgage lending on high debt-to-income ratios remained at high levels, it would consider the need for further macroprudential measures.

“It has also been stated by the regulator that implementing a limit on high debt-to-income ratios is operationally complex.

“Therefore, while the announcement may seem like a subtle change to housing lending conditions, there may be more tightening to come as the Council of Financial Regulators monitors trends in housing credit and household debt.”

Property Council of Australia executive director Ken Morrison also said he understood APRA’s rationale, but urged the regulator and other authorities to monitor the situation closely before introducing further restrictions, which would sap broader market confidence.

“Australia’s residential housing market is worth almost $10 trillion and housing represents the bedrock asset of many Australian families,” Mr Morrison said.

“This move comes when fiscal stimulus and the HomeBuilder effect are withdrawing from the economy, the successful transition out of lockdown of our two largest states has yet to occur and net overseas migration is still negative.

“Strong housing construction has underpinned Australia’s economic resilience through the pandemic and supports more jobs per dollar spent than any other industry and this should never be taken for granted.

“We urge the government at the regulator to keep a patient focus on the impacts of these changes until the New Year and to target their communications accordingly.”

Sydney-based mortgage broker Rebecca Jarrett-Dalton, founder of Two Red Shoes, said she believed the new APRA regulations would have unintended consequences for those most likely to benefit from lowered housing prices.

Ms Jarrett-Dalton said it was certainly prudent for regulators to try to make housing more accessible for all Australians, but the changes announced this week would have a disproportionate impact on rents, single parents and single buyers.

“Although property investors with multiple properties will have their borrowing limit reduced (a result which regulators are entirely happy with), this will inadvertently cause a lack of rental accommodation in the future,” Ms Jarrett-Dalton said.

“There are still people who want or need to rent, possibly these same people would also never pass the debt-to-income ratio (DTI) constraints in order to buy themselves.”

Ms Jarrett-Dalton said many lenders were already restricting DTI to a multiple of six times a person’s income, with the new legislation to only tighten them by a small amount.

“While we’re not advocating to let people borrow more than they can afford, there’s no reason to exclude large swathes of the population from owning their own homes,” she said. 

“Make no mistake, these ratios are tight, but if the DTI is capped at 6x, then it’s going to be very hard for a lot of people to live the Aussie dream of being a homeowner.  

“There is a lot of internet chatter circulating at the moment and the gist of it is ‘the bank says I cannot afford a $2,000 a month repayment but I am ok to keep paying $2,200 a month in rent.’ 

“With the proposed legislative changes, this is the reality that many Australians are facing.”