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Are we on the cusp of tighter credit conditions?
Could higher household debt trigger tighter credit conditions?
Are we on the cusp of tighter credit conditions?
The Reserve Bank’s ongoing focus on housing credit policies was reiterated in its statement following the board’s September meeting.
“Given the environment of rising housing prices and low interest rates, the bank is monitoring trends in housing borrowing carefully, and it is important that lending standards are maintained,” the RBA said.
And with the big four convinced that the tightening of credit policies is a matter of when, not if, CoreLogic’s Tim Lawless said this would have “an immediate” dampening effect on housing markets, the extent of which would depend on the scope and severity of the tighter credit conditions.
“Through previous rounds of macro-prudential policies and the banking royal commission, which saw housing credit harder to come by, the impact on housing activity and value growth was clear,” Mr Lawless pointed out.
Whether the regulators choose to yank the handbrake or whether they take a slightly more relaxed approach could depend on a number of factors, but Mr Lawless did note that, considering the pace of growth in housing credit against a backdrop of soft income growth, in all likelihood, “household debt will be at or close to record highs by the end of 2021”.
As such, he took a look down memory lane to ascertain the probable impacts on the market of macro-prudential action.
Namely, following the first round of macro-prudential intervention in December 2015, the impact was felt mid-2015 when the rate of home value growth started to taper, moving into negative territory between November 2015 and April 2016.
The impact of the second round, which involved a 30 per cent benchmark on the flow of newly originated interest-only home loans, was more immediate, resulting in the pace of home value appreciations slowing markedly from the date of implementation. As a consequence, national home values declined between late 2017 and early 2018.
Mr Lawless noted that through each of these periods of credit tightening, the impact on housing trends was more evident in markets that had heightened exposure to the rules.
“Sydney, for example, was the epicentre of investment activity, with investors comprising almost 56 per cent of mortgage demand in early 2015. Housing values in Sydney fell more sharply than the national average during each of these periods of credit policy adjustment as a result,” he said.
Mr Lawless believes that in the current situation, two responses are likely: raising the minimum interest rate used when assessing whether a borrower can service their loan; or portfolio-level restrictions imposed on lenders, establishing firm benchmarks on the proportion of high debt-to-income ratio loans that can be issued.
“Either of these options would have an impact on credit availability and limit the loan size relative to a borrower’s income or servicing ability,” he said.
Ultimately, he believes, stricter credit conditions could backfire by resulting in less home purchasing activity and adding to the headwinds of worsening housing affordability, higher levels of newly built supply and stalled overseas migration.
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