Macroprudential policy in play to cool housing exuberance...

APRA is releasing an information paper on its framework for implementing macroprudential policy over the next couple of months, suggesting macroprudential measures to cool the housing market could be implemented by the end of 2021/early 2022 assuming that growth in housing debt remains strong and continues to materially outpace growth in household income. Surprisingly, the AFR recently suggested that regulators will focus on highly-leveraged borrowers, many of whom are first home-buyers. Macroprudential measures will make it harder at the margin for the RBA to achieve higher inflation given the housing market is a key part of the transmission mechanism for monetary policy.

The Council of Financial Regulators (CFR), which is chaired by Governor Lowe, has issued its quarterly statement, where the treasurer attended last Friday’s meeting. The main focus was a further discussion of the housing market and macroprudential policy, although the council also discussed payments system regulation, digital currencies, climate change and pandemic insurance claims.

As Governor Lowe has previously said, regulators are watching the housing market for two risks to financial stability, namely:

• the risk that banks lower lending standards; and
• system-wide risks from already-high housing debt growing at a faster rate than household income.

The CFR is clearly focused on the second risk, saying it is “mindful that a period of credit growth materially outpacing growth in household income would add to the medium-term risks facing the economy, notwithstanding that lending standards remain sound”. This concern is understandable given that annual growth in housing debt is on track to reach about 10% later this year given the recent surge in new loans, which would be the fastest growth in about a decade and well in excess of current growth in household income of 1% and the RBA’s forecast growth of about 3% over the next year or so.

Lowe has said that the gap between growth in debt and income would have to be sustained to trigger a policy response, but that point looks to be approaching with the CFR discussing “possible macroprudential policy responses”. The CFR said “APRA will continue to consult with the on the implementation of any particular measure” and APRA plans to publish an information paper on its framework for implementing macroprudential policy over the next couple of months.

In terms of the measures APRA might implement, an AFR article this week suggested that regulators were focused on the recent sharp increase in highly-leveraged borrowers, even though quotes from the treasurer focused on Lowe’s second broader point about the growth in debt versus income. For our part, such a focus seems somewhat misguided because it seems likely that the sharp increase in highly-leveraged borrowers partly reflects the recent very large influx of first home-buyers into the market, which is also the RBA’s interpretation. However, the treasurer seemed to point in that direction, noting in the AFR that “carefully targeted and timely adjustments are sometimes necessary there are a range of tools available to APRA to deliver this outcome.” If regulatory measures focus on that segment of the housing market, it would likely add to the natural cooling of first home-buyer demand over the coming year as the boost from earlier government housing subsidies fades. One of the alternative approaches that has been mentioned by Lowe would be to slow system-wide growth in lending.

For monetary policy, assuming that housing debt remains strong and materially outpaces growth in household income, new macroprudential measures would make it harder at the margin for the RBA to return inflation to the 2-3% target band given that that the housing market is a key part of the transmission mechanism of monetary policy. In terms of past experience, macroprudential measures in the mid to late 2010s were aimed at curbing investor demand and interest-only borrowing, where there was a noticeable impact on house prices. If new measures are directed at highly-leveraged borrowers and hence curb first home-buyer demand, there is also likely to be an impact on house prices given that first home-buyers – contrary to public perception – generally buy existing homes, with a subsequent effect on construction.

Note that the RBA will provide an in-depth update on its view of the housing market and financial stability in its Financial Stability Review issued on 8 October.  

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