Back in August 2017 I estimated the potential value of interest-only ('IO') mortgage resets by calendar year for loans approved outside current standards, noting that the most impacted borrowers would likely be portfolio investors.
Both the Reserve Bank and APRA had expressed concern with the unusually high volume of IO mortgages in Australia, and a range of measures were taken to strangle the trend accordingly.
Plenty had doubted the regulator's stomach to curtail IO lending, yet the latest figures released this week confirmed that APRA's remedial surgery has been both swift and effective.
As I detailed here earlier this week, the flow of new IO loans has been tracking at under 16 per cent of new lending for six months, a long way below the initially suggested 30 per cent limit.
Meanwhile, rational borrowers have taken advantage of more attractive mortgage rates on principal-and-interest loans to begin paying down their debt voluntarily.
The impact on the stock of outstanding IO loans has thus also been marked.
Indeed, over the past year the stock of IO loans has dropped by $93.2 billion or 16.1 per cent.
IO loans by value therefore retraced very quickly to 30.8 per cent of residential loans outstanding by the end of March 2018, from 38.5 per cent year earlier.
As I write this in late June, at the prevailing rate of decline that figure will be down to a historically low ¼ of outstanding mortgages within a matter of months.
If this class of lending product was considered to be too prevalent, that won't be the case for much longer.
Serviceability tighter in 2018
The regulator's quarterly ADI statistics further showed that about $4.3 billion of loans were approved outside serviceability in the March 2018 quarter, down from $5.2 billion in the final quarter of 2017.
APRA notes that caution should be exercised when interpreting these figures, with consistency between different lenders and reporting periods representing a perennial challenge.
Some lenders will report all loans referred for review via their reporting tools, for example, while others will habitually file a nil return. Such is the nature of surveys and data collection.
What these figures broadly represent is a period where lending standards have been tightened, with a pool of applications in the pipeline sometimes classified as outside serviceability - so this likely implies that tighter standards have continued into 2018.
Certainly we can say that the stock of IO mortgages have continued their precipitous decline, while loan-to-value ratios (LVRs) are the tightest we've ever seen reported across this data series.
Pundits seeking a familiar narrative are invariably drawn towards comparing Australia's IO loans to US subprime mortgages, despite not the dynamics not being remotely comparable (there's always something that's going to crash the Aussie lending market - in recent years it was the resources downturn, before that it was 'Ruddprime' mortgages, and before that it was 'debt pressure').
Liaison with mortgage brokers suggests that most borrowers are handling the switch comfortably enough, with the few looming exceptions generally relating to portfolio investors.
Investors with larger portfolios comprising multiple properties with IO loans represent a relatively small cohort, and most built their portfolios over a long period of time, improving their cashflows and equity in doing so.
In the worst case, some investors may need to sell a property or two to reduce debt.
It's also important to note that lenders have very little incentive to force stretched borrowers into arrears or default; it serves nobody's interests.
Foot off the brake
IO resets of the present magnitude aren't unprecedented, and alone won't pose too much of a problem.
The bigger risk is that tighter lending standards run so far that they begin to damage the confidence of consumers to borrow and spend. Arguably this hit to confidence is already happening.
As Treasurer Morrison rightly pointed out on Business Insider's Devils & Details podcast, the most pressing advantage of the way macroprudential measures have conditioned enthusiasm over, say, structural changes in tax legislation, is that they are immediately reversible:
'The virtue of the tools used by the regulators should not be understated.
These are highly flexible rules; they can be reversed in an afternoon.
If you change negative gearing and capital gains tax, then strap yourself in, because you're in for a rollercoaster ride that's only going in one direction.'
In real time, Sydney's dwelling prices are about 10 per cent off their early 2017 peaks, the stock of IO loans is likely by now about 29 per cent and falling fast, and no other major housing market is even remotely at risk of overheating.
The cycle is thus approaching a critical point.
It will soon be time for macroprudential measures to be eased back before the risks of a greater fallout loom too large.