UK-style lending curbs ‘better’ for Aussie market

RP Data senior research analyst Cameron Kusher said that while he believes the UK model is better than the New Zealand model, neither is bulletproof.

“We’ll probably see some different iteration to what we’ve seen in those other [countries] here in Australia, if and when it’s introduced,” Mr Kusher told Mortgage Business.

“Maybe the UK tool is a good one. I don’t really understand how it works with the investor market, though, so that’s probably my one question there,” he said.

“But maybe even something as simple as making the banks hold more capital against residential mortgages would be a way to encourage banks to lend to people outside the mortgage space – maybe lend more to businesses or personal loans.”

While Mr Kusher admits he has no preference to which tools are used to rein in investor lending, he warns that APRA must be careful to not unintentionally curb new dwelling construction.

“As we move away from mining investment to construction activity – and specifically residential construction activity – there’s a really strong pipeline of dwelling approvals now, but they want to make sure that they come to fruition,” he said.

“So it’s going to be a tough call as to how exactly to implement macroprudential tools, but I think, realistically, the rest of the economy needs low interest rates, and the only reason they’re looking at doing this is because they can’t lift the interest rates for the housing market because the rest of the economy needs those low interest rates.”

On Tuesday the RBA left rates on hold for the 14th consecutive month.

Surprisingly, the central bank’s accompanying statement failed to mention any of the concerns it has flagged in recent weeks regarding the ‘unbalanced’ mortgage market. 

“Interest rates are very low and have continued to edge lower over recent months as competition to lend has increased,” the RBA said. 

“Investors continue to look for higher returns in response to low rates on safe instruments,” it said.

“Credit growth is moderate overall, but with a further pick-up in recent months in lending to investors in housing assets.

“Dwelling prices have continued to rise over recent months.”

As the industry awaits further details about the RBA and APRA’s plans to curb investor lending through the use of macroprudential tools, parallels continue to be drawn with the UK and New Zealand mortgage markets.

In the UK, the Financial Policy Committee – an official committee of the Bank of England – recently put in place two measures to minimise the risk of an overheating housing market.

The first was to require lenders to stress test a borrower’s affordability if interest rates were to rise by three per cent in the next five years.

The second was to limit the amount of new mortgage lending with loan-to-income (LTI) ratios greater than 4.5 times to 15 per cent of new lending.

Barclays chief executive officer, mortgages, Steve Weston said on the whole the measures have been straightforward to implement.

“There is a general acceptance that base rates are going to increase so stress testing affordability – which all lenders would have been doing to some degree – is prudent,” Mr Weston told Mortgage Business.

“On average, less than 15 per cent of all new lending had LTI ratios of less than 15 per cent so this was more of our pre-emptive measure than seeking to slow activity down from its current levels,” he said.

New Zealand’s decision to implement LVR caps last October has received mixed responses, with some industry figures blaming the measures on market distortions.

Implemented last October by the Reserve Bank of New Zealand (RBNZ), the restrictions prohibit banks from issuing more than 10 per cent of new residential loans to customers who have an LVR of more than 80 per cent.

Marlborough-based mortgage broker and financial planner Paul Fuller told Mortgage Business the LVR limits have worked to slow the housing market, but in turn have created additional problems.

“People are being trapped by not being able to sell because when they sell and pay real estate fees they don’t come out with enough equity to actually buy another house,” Mr Fuller said.

“That has become a problem of its own,” he said.

Appearing before a senate inquiry, RBA assistant governor Malcolm Edey said more details on its use of macroprudential tools will be announced by the end of the year.