APRA have, thankfully, taken a subtle approach.
I’ll be honest. I’m not totally clear on what APRA’s trying to do here.
So I guess you heard the news. APRA has announced that banks have to increase their serviceability buffers from 2.5% to 3%.
That means that if you’re going for a mortgage with a rate of 4.0%, the banks will need to crunch your serviceability numbers at a rate of 7%. They need to make sure you’ve got enough buffer in there to cope with any unforeseen changes or any distant rate hikes.
So in an of itself, it’s not huge. The jump from 2.5% to 3% isn’t massive. As Eliza Owen at Corelogic states, it’s ‘subtle’.
And it’s probably not going to move the dial all that much. APRA reckons it will decrease the loan size for the average borrower by about 5%, but I’m not even sure it’d be that much.
And it’s going to have different impacts on different segments. As Eliza Owen notes, it will impact investors more than owner-occupiers:
… Because owner occupier mortgage rates are lower than investor rates, these changes may actually have more impact on the investment segment of the market. Additionally, as APRA notes in their announcement, investors tend to be more leveraged in their borrowing behaviour and may be carrying additional housing debt which would also be subject to the increased serviceability assessment.
So Investors might notice it more, but again, the impact is going to be “subtle”.
So, the interesting question for me is where is this coming from, and where is it going?
In terms of where it is coming from, the Council of Financial Regulators (the RBA, APRA and ASIC) have been flagging for a while that the market was looking a little riskier than it might like.
It did note that it’s not interested in the price of housing per se, but in the risk profile of the banks’ mortgage books.
We had seen them note a few points:
- 21.9 per cent of all new loans funded in the June quarter had a debt-to-income the ratio of six or more, a level which is considered risky by APRA.
- This is up from 16 per cent of all new loans funded in the June 2020 quarter.
- For all households, housing debt-to-income ratios reached record highs for owner occupiers at 102%,
- Annual housing credit growth (5.6%) is outstripping income growth (1.6%).
Sure. Maybe the market is a touch more risky. But you know what else has happened since Covid?
We’ve had a boom in first home buyers entering the market – a cohort which typically has lower incomes and higher debt loads.
So it’s not clear to me that these metrics don’t just reflect we’ve had a boom in first home buyer activity.
Still, I do think APRA has learnt the lessons of 2017.
Back then they were less ‘subtle’ and a touch more heavy handed with their ‘macro-prudential’ interventions.
National prices fell -8.4%. In Sydney it was 15% and in Melbourne it was 14%.
Now, I don’t think anything like that is going to happen this time around.
I think they’re taking a much more softly, softly approach. They’ll wait and see what impact this has before they do anything further.
And that also means that they may not be done. We may see more intervention in the months ahead if the numbers keep going the wrong way.
But for the moment, I’m glad they’re taking a ‘subtle’ approach.