The Australian Prudential Regulation Authority embarked on its third round of macroprudential intervention in the mortgage market this week, when it increased the minimum interest rate buffer for loan serviceability assessments from 2.5 per cent to 3 per cent.
APRA previously imposed limits on mortgage lending in 2014 and 2017 – both since removed. Analysis of those measures by the Australian Competition and Consumer Commission, the Productivity Commission and the Reserve Bank indicate that there were shortcomings, including the promotion of anti-competitive behaviour, the creation of a more favourable environment for big banks and unclear direction from APRA.
More generally, reviews of the impacts of macroprudential regulation by the Bank for International Settlements and the Reserve Bank show a range of other problems that regulators need to overcome to implement macroprudential policy effectively.
APRA’s macroprudential track record includes the following:
• In December 2014, APRA wrote to ADIs saying that investor mortgage portfolio growth "materially above a threshold of 10 per cent" would be seen as "an important risk indicator" in considering the need for further action.• It also recommended that lenders tighten their serviceability buffers. This included an interest rate floor of 7 per cent and a buffer of at least 2 per cent above the loan rate.• In March 2017, APRA asked ADIs to limit new interest-only mortgage lending by ADIs to no more than 30 per cent of total new residential mortgage lending. • It also told ADIs it expected them to place “strict internal limits’ on the volume of interest-only lending at loan-to-valuation ratios above 80 per cent and ensure “strong justification” if any instances of interest-only ending at LVRs above 90 per cent.• In April 2018, APRA removed the 10 per cent investor loan benchmark, conditional on banks providing assurance of ongoing safe lending practices.• In December 2018, APRA removed the 30 per cent interest-only benchmark, stating that the measure had served its purpose in reducing interest-only lending.• In July 2019, APRA removed of the 7 per cent interest rate floor (which in practice was 7.25 per cent) and increased the buffer to 2.5 per cent when assessing a home loan application. ADIs were permitted to set their own minimum interest rate floors and buffers for use in serviceability assessments.
APRA’s own assessment of these measures was that lending standards improved. The growth in credit for housing remained stable but the composition changed considerably: the rate of growth in lending to investors fell and the proportion of interest-only loans halved. Lending on high LVRs also moderated.
The ACCC took a different tack. In a report on home loan pricing in 2018, it argued that the interest-only cap had the effect of lessening competition and led to “synchronised” rate increases.
The ACCC found that the average interest paid by investors with interest-only loans rose sharply from March to September 2017.
“We found that that the interest-only benchmark lessened price competition for interest-only loans by providing an opportunity for the big banks and other lenders to synchronise their increases to interest rates on these loans