The Australian’s Adam Creighton has today joined the attack on the Australian Prudential Regulatory Authority’s (APRA) pathetically weak 10% speed limit on investor mortgage lending growth:
Australia’s home-lending market is a little out of control. Sydney’s house prices have just risen 19 per cent in a single year, fuelled by surging debt levels, following years of double-digit rises.
Credit to buy houses and apartments, for investors and owner-occupiers, has been growing between two and seven times as fast as consumer prices, wages or the population for about five years in a row…
Paul Keating famously said John Hewson’s attacks on him were like being flogged with warm lettuce. He might have characterised APRA’s crackdown on home lending similarly…
Worried by surging debt, the banking regulator imposed a cap on loan growth roughly equivalent to the fastest experienced rate of annual loan growth since the financial crisis of 2008. Take that, investors.
APRA’s 10 per cent cap on investor loan growth is even less “tough” than it sounds, given the much larger base of investor loans outstanding — $572 billion as of last month. That’s more than double the value of a decade ago, when loan values were growing at more than 20 per cent a year. Apart from a stern talking to, there’s no penalty for financial institutions to exceed the cap, either.
No wonder the big banks didn’t complain. Indeed, the Commonwealth Bank, chief beneficiary of Australia’s hot property market, conceded last month it can still make a fortune without hitting APRA’s limit…
In fairness to APRA, the economy has become so dependent on debt-fuelled house price appreciation and apartment construction that anything that suddenly sapped enthusiasm for housing could derail Australia’s economic growth. And no one wants to be accused of causing that.
Too right. Part of the problem is the separation of powers between APRA and the RBA.
APRA is responsible for prudential regulation and maintaining lending standards, whereas the RBA is largely responsible for managing the cost of credit via interest rates as well as overall financial stability.
This separation of powers is not working in Australia’s favour, with both agencies working at cross-purposes.
Over recent years, we have seen the RBA lower the cost of credit (via dropping interest rates) in a bid buttress the economy against the end of the mining boom, lower the Australian dollar, and improve the competitiveness of the non-mining trade-exposed economy.
Unfortunately, this lowering of interest rates has also reflated Australia’s housing and private debt bubble, leaving the economy and financial system vulnerable to a bust down the track.
Meanwhile, APRA has been delinquent in bolstering lending standards, which itself admitted had fallen to horribly low levels in 2015, and only acted belatedly to implement a timid 10% ‘speed limit’ on investor lending, which was way too generous, as noted by Creighton above.
The situation has also been hindered by the RBA, which over several years repeatedly downplayed the need for macro-prudential measures, claiming they are both undesirable and ineffective.
The end result is the dysfunctional regulatory system we have in place now, with the RBA and APRA ‘passing the buck’ and refusing to take responsibility for the bubble.
Now compare Australia’s situation with the Reserve Bank of New Zealand (RBNZ), which has responsibility for both monetary policy and prudential regulation. This joint responsibility has seen the RBNZ take a much more ‘hands-on’ and transparent approach to managing housing risks, including the early implementation of macro-prudential curbs and frequent adjustments, along with frequent stern ‘jawboning’ of housing risks to the community.
The RBNZ’s ‘frank and fearless’ assessments have also shamed the country’s politicians to act on housing – something that is totally lacking from Australia’s financial regulators, who rarely speak-out and put pressure on our policy makers to reform the housing system.
In short, the APRA/RBA separation is failing Australia.
