Odinian Beta

Despite the pandemic and lockdowns, Australia’s housing market has continued to boom.

The main reason is extremely-low interest rates and low unemployment, which are allowing people to borrow more and more to afford ever-higher house prices.

Even with Sydney and Melbourne in lockdown over the past few months, this hasn’t stopped the ongoing housing boom. House prices have now risen by 20% over the past year to September.

Unfortunately, with so many people desperate to buy a house before it becomes too expensive, this is starting to worry both the banks and their regulator, APRA.

As APRA noted:

“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building.”

The regulator continued:

“At an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead.”

In the quarter to 30 June, more than one in five loans issued by the banks were to customers that had debt-to-total income ratios of more than six times.

As a result, APRA has written to the banks saying it expects them to increase the “serviceability buffer” from 2.5% to 3.0%. The serviceability buffer is the amount that the banks add to the interest rate on loans to determine the ability of borrowers to continue to repay their loans if interest rates move higher.

The regulator didn’t reduce the debt-to-income ratio nor lift the interest rate floor that lenders use because it believes the serviceability buffer acts as a cap on leverage, is fairly easy to implement and wont have any impact on mortgage rates.

At this stage, APRA hopes its changes will only impact investors, who tend to be more leveraged than owner-occupiers, and the other two potential changes would impact the latter as well.

The changes will only apply to new borrowers. APRA estimates that the 0.5% increase in the serviceability buffer will lead to a 5% decline in the maximum borrowing capacity of the typical borrower.

The regulator does admit though that the overall impact on housing credit growth is likely to be “fairly modest”.

As such, I don’t see this change having a material impact on the profits of the big banks including Commonwealth Bank (ASX: CBA), NAB (ASX: NAB), Westpac (ASX: WBC) and ANZ (ASX: ANZ).

In my view, this looks like APRA is trying to maintain financial stability in light of the RBA’s refusal to raise extremely-low interest rates, which are the real cause of the housing boom.

As such, if the increase in the serviceability buffer doesn’t work to cool house prices, then I think it likely that APRA implements additional restrictions to try to reduce the risk from the RBA’s ongoing too-easy monetary policy.

It is good to see that at least one regulator in Australia is thinking long-term to protect taxpayers, who will be the ones ultimately on the hook should any of the big banks get into financial trouble.

As such, APRA and Chairman Wayne Byers should be congratulated on this move.