16.1 per cent annual increase in house prices, which amounted to the fastest growth reported in more than 17 years. Therefore, as overall credit growth heads towards double digits, multinational investment banking company the Macquarie Group cautions that regulators may step in with certain macroprudential intervention, bringing an end to the big banks’ golden COVID-19 run.
Although the Reserve Bank of Australia and the Australian Prudential Regulation Authority (APRA) have continuously insisted that such measures are not designed to control house prices, Macquarie pointed out that it is unlikely regulators would sit back and watch as credit growth climb shigher and higher.
This is in line with past experience, when regulators imposed several restrictions with the aim of cooling down the housing market, following a price boom in 2014 and 2017. In late 2014, the APRA forced lenders to slash their annual growth in investor mortgages to 10 per cent, and in 2017, banks were also required to reduce their interest-only mortgages to 30 per cent of their total new housing lending.
One may argue that the current housing price boom is very different, since it was residential property investors who previously drove the market. However, although it may be owner-occupiers who are driving the current house price boom, Macquarie pointed out that as overall credit growth continues to rise, so does the likelihood of macroprudential intervention.
According to the Australian investment bank, one of the most likely measures to be taken by the APRA is an increase in the serviceability buffers which are used by banks to stress test a customer’s ability to live with their mortgage. Macquarie pointed out that if the current buffer, which sits at about 2.5 per cent, was increased by 0.5 per cent, it would result in a 5 to 6 per cent decrease in the maximum borrowing capacity of an individual borrower. The company noted that if this is proven to be unsuccessful, the regulator may consider several other measures such as restrictions on loans with high loan-to-value ratios, or limitations on growth speed as used in 2014 and 2017.
