Buffers to stay tight
APRA announced today that for the time being the 3 percentage points lending assessment buffers will remain in place for mortgage borrowers:
Here is what the APRA Chair had to say:
Source: APRA
Quickly to step through those points...
Firstly, inflation has continued to moderate, and the risk of higher interest rates has receded.
No arguments there. Although it's become more fashionable to talk about the risks of steepling inflation, a more sober view suggests that there may soon be bigger fish to fry given how inflation has continued to moderate since the December 2022 peak.
Source: ABS
Markets are generally expecting interest rates to be lower over the years ahead, rather than higher, which doesn't necessarily appear to align with the 3 percentage points assessment buffer.
Source: ASX
Secondly, the regulator is mindful of shocks to households given the slowing labour market and geopolitical uncertainty.
"Geopolitical uncertainty" is always and everywhere an issue, and to be honest I'm not really sure what that point means.
Employment has grown by around +400,000 over the past year to a record high of above 14½ million, and the unemployment rate is 4.1 per cent.
There isn't much evidence of how the lending assessment buffer factors into those figures either.
Thirdly, credit is available to good quality borrowers.
This is basically the crux of the matter currently - you can borrow if you have an income of $250,000, and perhaps if you have wealthy parents - but otherwise for first homebuyers and lower income-earners you're being stress-tested for a 9½ per cent mortgage rate that you'll never pay, and you are effectively locked out of the market.
And fourthly, house prices are higher than in 2020, and household debt levels are relatively high.
This is also true, although it's not clear that targeting housing prices or debt levels is the specific aim of the macroprudential policy toolkit:
"...[the] macroprudential policy toolkit is aimed at promoting stability at a systemic level to ensure financial institutions can continue to supply the credit and payment services required for the economy to grow at a sustainable rate".
The ratio of household debt to disposable income is currently around 1.85x - although if you net off mortgage prepayments buffers and offset account balances debt levels are manageable - and actually hasn't changed much for the past decade-and-a-half (a point highlighted by the Reserve Bank of Australia, by the way, not by me).
The wrap
Overall, the constrained credit environment appears to be a co-ordinated attempt to conclusively break the back of inflation, and lending assessment buffers thus seem unlikely to change until interest rates are clearly on the way down.
This is working to slow inflation, but also has dropped building approvals to decade lows and dwelling construction is consistently failing to keep pace with high levels of demand from population growth.
However, from a financial stability perspective, shortages of urban housing in magnet cities may also be associated with volatility and risks later in the cycle, as previously evidenced in the US and Europe.
This was discussed in
this book, for example.
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