Form UBS today, which is doing a fantastic job of pulling apart the bubble at the moment:
APRA today announced plans to remove the investor lending cap…
APRA today announced the removal of the 10% investor loan growth cap from Jul-18 (which had been in place since Dec-14). That said, this only applies after ADIs can demonstrate: investor loan growth has been below 10% for the past 6 months; & they comply with ‘responsible lending’. APRA also cautioned lenders that return to more rapid investor loan growth could lead them to consider “the need to apply the countercyclical capital buffer or some other industry-wide measure”.
…but tightened focus on expenses benchmarks and debt-to-income limits
While lifting the investor cap appears a loosening in macroprudential policy, the coincident requirement to meet responsible lending (we think) represents a material (net) tightening in policy. APRA reiterated that policies for serviceability assessments by lenders are expected to include interest rate buffers (7¼% assumed interest rate floor) & discounts on ‘variable’ income. However, today they added more explicit tightening of lending practices (as we expected) including: reducing the use of benchmarks which are “not a replacement for making reasonable inquiries”, & encouraging the collection of borrowers actual expenses; as well as instructing lenders to develop risk appetite limits on very high debt-to-income loans (~6x+) under comprehensive credit reporting. Indeed, APRA warned that “Boards should be cognisant that ADIs are required to comply with responsible lending”…and any “policy overrides….must also comply”.
Implications: macroprudential ‘phase 3’ means downside risk to housing & RBA
Today’s announcement, of what is effectively macroprudential ‘phase 3’, suggests a more rapid tightening of lending standards than our base case outlook. Despite the perception of the removal of macro-prudential investor limits as ‘an easing’, we see this as further evidence of our credit tightening scenario. The risk of a ‘credit crunch’ cannot be ruled out. This raises the risk of a material negative impact on housing and the economy. We see downside risk to our housing & RBA views, & it’s becoming more likely the RBA will keep rates steady beyond our long-held forecast of a Q1-19 hike.