The Australian Prudential Regulation Authority will clamp down on lending to property investors, increasing the Reserve Bank of Australia’s scope to cut official interest rates in the face of a faltering economy without risking a housing bubble.
Banks should keep growth in loans to property investors below 10 per cent a year, APRA told them in briefings after the sharemarket closed on Tuesday.
Credit growth to investors hit 9.9 per cent in October.
APRA warned it is ready to force banks that are too lax on property lending to hold more capital, a move that would hit their profits.
APRA chairman Wayne Byres said the measures, which haven’t been used in Australia since the early 1980s before financial deregulation, were a “measured and targeted response to emerging pressures in the housing market”.
“These steps represent a dialling up in the intensity of APRA’s supervision, proportionate to the current level of risk and targeted at specific higher risk lending practices in individual [banks].”
Regulators could take the extraordinary step of clamping down on credit as the economy is weakening, global outlook has worsened on falling energy prices and concerns about the federal government’s budget have crunched business sentiment.
The move endorses a warning in Sunday’s financial system inquiry report that capital gains tax concessions for investors are encouraging property speculation and pose a systemic risk to the economy.
Doubts about the economy saw the dollar hit a fresh four-year low of US82.24¢ on Tuesday, the ninth straight day of losses and the longest streak of declines since its 1983 float. The ASX/200 fell 1.7 per cent.
Two weeks ago the prospect of more Reserve Bank rate cuts was almost unthinkable and most analysts expected an increase. Yet with the economy slowing sharply over the past six months, inflation low, the terms of trade declining at twice the pace of official forecasts and renewed concern over the budget, more high-profile forecasters are predicting cuts in 2015.
National Australia Bank chief economist Alan Oster said on Tuesday he now expects two rate cuts in 2015 after NAB’s monthly business confidence index fell last month to the lowest level since mid-2013.
Reserve Bank governor Glenn Stevens re-ignited talk of additional stimulus this month by hardening calls over the need for a lower dollar.
The remarks – which were endorsed by Treasurer Joe Hockey last week in an interview with The Australian Financial Review – represent a renewed push to “jawbone” down the currency, which continues to hurt exporters.
“If these [APRA lending] measures turn out to be effective – and that is an important caveat – then that does obviously remove one of the obstacles [to a lower cash rate],” said Bank of America Merrill Lynch Australia chief economist Saul Eslake. “A judgement would still have to be made as to whether cutting interest rates by another quarter or half a per cent would make a material difference [to the economy].”
Pressure has been growing all year on regulators and the central bank to address what appears to be an increasingly unsustainable surge in some housing markets, led by investors.
On Tuesday APRA formally asked banks to ensure new borrowers can cope with mortgage repayments when interest rates are 2 per cent higher than they are now.
It is understood that most banks operate interest rate buffers of 2 per cent and floors of 7 per cent already. The regulator warned “good practice would be to maintain a buffer and floor rate comfortably above these levels”.
In a separate but related announcement, the Australian Securities and Investments Commission said after market on Tuesday it is conducting a probe against banks, including the big four, on the provision of interest-only loans, as part of a broader review by regulators into home-lending standards.
APRA’s steps were taken following discussions with other members of the Council of Financial Regulators, which include ASIC, Treasury and the Reserve Bank.
Mr Stevens – as was foreshadowed by the Financial Review in September – revealed in October that APRA and the Reserve Bank were looking at announcing potential limits, often described in Europe and the US as “macroprudential tools” – before the end of this year.
Late last month, Dr Byres told a parliamentary hearing he did not want to be rushed into making a rash decision on lending curbs that might need to be reversed.
Since then a flurry of negative economic data has swung the debate back towards potential rate cuts. This month’s September quarter national accounts showed the economy grew just 0.3 per cent in the quarter, hampered by what has been dubbed by analysts as an “income recession” involving weak wages growth, soft company earnings and falling tax revenue.
Annual growth in investor lending has almost doubled over the past 18 months to 9.9 per cent, according to Reserve Bank data.
Westpac Banking Corp has the highest proportion of investment housing loans of the big four with 45.2 per cent of its book in the investment sector. Chief executive Gail Kelly said at the bank’s full year results it was “very comfortable” with its lending book, “and in particular our investor portfolio”.
Will Hamilton, former banker and now managing partner at Hamilton Wealth Management, said bank credit departments are very robust, “but there is concern about high-risk mortgage lending going out there in the wider market,” he said.
APRA said during the first quarter of 2015 its supervisors will be reviewing bank lending practices and, where a bank is not maintaining a prudent approach, APRA “may institute further supervisory action”. “This could include increases in the level of capital that those individual ADIs are required to hold,” APRA said.
The threat to raise capital levels comes just days after the final report of the financial system inquiry called for the big banks to carry higher capital against mortgages and for all banks to lift capital to ensure they are in the top quartile of global banks.
The prudential regulator said it did not expect its actions to have any effect on the availability of credit for people borrowing within their means to purchase a home. APRA spoke to the banks in telephone calls on Tuesday afternoon ahead of sending the letter.
APRA said did not propose to introduce across-the-board increases in capital requirements, or caps on particular types of loans, to address current risks in the housing sector.
It indicated historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating credit growth, prompted it upping the level of supervisory oversight on mortgage lending in the period ahead.