Credit Limits Cool Housing Market But Help Big Banks
Analysis of 28 banks shows that they reduced the growth of new lending to targeted lending by about 20 to 40 percentage points in one year.
To slow lending, interest rate differentials on investor and interest-only mortgage products increased 0.1 to 0.3 percentage points. Banks’ mortgage interest income increased.
Home loans from the Big Four banks have not slowed as they steered customers toward non-restricted mortgage products such as principal and interest loans, RBA economists noted.
Financial regulators are closely monitoring the resumption of home loans and the return of real estate investors.
Sales of mortgages from other banks declined and the restrictions had some anti-competitive effect – a finding consistent with previous findings on mortgage pricing by the Australian Competition and Consumer Commission.
“For example, when financial institutions cut interest-only lending, big banks increased their principal and interest lending, unlike midsize banks,” noted RBA economists Nicholas Garvin, Alex Kearney and Corrine Rosé.
“In addition, the policies had some effect on competition among the 28 banks we analyze, although the impact was short-lived.”
In recent months, RBA Governor Philip Lowe and APRA Chairman Wayne Byres have said that one of the factors they would consider stepping into the mortgage market again is the extent to which growth housing credit exceeds income growth.
Macroprudential policy options that APRA and RBA are exploring include restrictions on debt-to-income and loan-to-value ratios, and stricter rules for interest-only loans and loans to investors as between 2014 and 2018.
“We are not at the point where we are actively considering implementing initiatives in this area, but we are preparing for what might happen, what we might do if credit growth accelerates,” said Dr Lowe on June 17. .
“I don’t think it’s in the country’s interest to have an extended period of credit growth far outstripping our income growth, especially given the high levels of debt.”
Financial regulators are closely monitoring the resumption of home loans and the return of real estate investors, with boards of directors of major banks being asked to pledge to uphold lending standards and provide data proving they are accountable.
The Board of Financial Regulators – which includes the RBA, APRA, the Australian Securities and Investments Commission and the Treasury – said last month it was paying attention to high levels of household debt as well as “Policy options” that could be deployed to remedy this. risks.
Throughout the past year, during the economic shock of COVID-19, investors pulled out of the real estate market and home buyers increased their purchases.
But in recent months, investors have returned, buoyed by rising prices and ultra-low interest rates.
Homeowner credit growth rose 0.7% in May and investor credit growth 0.4%, but the gap is narrowing between the two cohorts of borrowers.
In annual terms, homeowner credit growth was 6.6% and investor credit growth climbed to 1.6%.
Previous restrictions on home loans ended in 2018, after house prices in Sydney and Melbourne fell and investors pulled out of the market.
Perhaps positively, the RBA has detected signs that business credit may have increased slightly in response to restrictions on home loans.
“There is evidence of a resumption in business credit growth over investor policy.
“This result is consistent with a substitution for corporate credit by banks offsetting fewer mortgage arrangements by investors.”