In Australia, it just doesn’t do to tell the truth about our ruling classes. Take, for instance, Wayne Byers, chairman of the Australian Prudential Regulatory Authority. As the Hayne Royal Commission exposed banking disgrace after crime in 2019, it became abundantly clear that APRA had completely failed under Byers over the previous cycle.
Yet what happened? Why! He was reappointed in the middle of the HRC, immediately before Justice Hayne turned to condemn APRA ‘s failings. Byers should have been sacked or resigned, as some within the Australian parliament demanded.
In terms of incentives, then, Byers was captured by Treasurer Frydenberg personally, over the national interest.
This conflict of interest is about to be cast in stark relief against Australia’s economic needs. As the latest round of property bubble moves towards blowoff, stoked directly by APRA and its easing of mortgage lending buffers in 2019, and cheered on by Treasurer Frydenberg, leading standards are going to tumble, if they have not already.
If this is allowed to run for much longer it will do serious harm to the national interest as financial stability is threatened, the AUD is driven up versus the counter-factual and it will become impossible for the RBA to ever tighten again.
That is, the national interest and the Government’s interest are rapidly diverging. With an election due early next year, Treasurer Frydenberg is furiously trying to stoke the bubble to ever greater heights by scrapping the very responsible lending laws that the HRC fully endorsed. There is another senate vote on these in June.
The base case is still that the cross-bench will defend the laws so Byers may not face the fateful choice of having to tighten on mortgages immediately after the Government loosens them, and directly before the election. But he should be. He should be doing it right now to ensure that as much of the RBA easing as possible is tipped into the AUD so that nominal growth lifts with exports and national income, budget repair is accelerated, and Australia can remain competitive as the Government seeks to diversify the external sector from China.
So, a captured Byers most likely won’t tighten before the election. He owes his mate Frydenberg, personally.
What about afterward? The need then will be great. Yet the Government will quite likely have just campaigned on Labor risk to house prices. Will Byers move then? And what will he do? Capital Economics has a crack using the RBNZ template:
- New Zealand’s experience suggests that the planned increase in risk-weightings for investor housing loans in Australia won’t act as a big deterrent to bank lending. If investor loan growth started to run hot, the banking regulator would have to respond with direct caps on lending growth or LTV ratios.
- Lending standards in Australia have remained sound so far, but with the housing market roaring to life there are mounting risks that banks will become exuberant. To forestall a renewed surge in riskier interest-only loans and lending to investors, the Australian Prudential Regulatory intends to make changes to its capital framework which should come into effect on 1st January 2023.
- There are two key changes. First, loans to investors will carry a higher risk-weighting for the calculation of risk-weighted assets than loans to owner-occupiers, with the surcharge widening non-linearly with loan-to-value ratios. (See Table 1.) Based on the current LTV distribution of new mortgage lending, we estimate that the risk-weighting of investor loans would rise by around 9%-points. What’s more, all investor loans and interest-only owner-occupier loans will carry a higher multiplier of 1.6 compared to the 1.4 for standard principal and interest owner-occupier loans.
- We doubt that those changes will act as a major deterrent to investor lending. After all, the Reserve Bank of New Zealand made a similar change on 1st November 2015, prescribing a higher risk-weighting for investor loans. (See Table 1 again.) While that resulted in a brief decline in the share of investor lending, it jumped to a fresh high in mid-2016. This prompted the Bank to stipulate that only 5% of lending to investors could take place at loan-to-value ratios above 60% less than a year later. And the suspension of the cap on investor lending last April triggered a renewed rise. (See Chart 1)
- For now, lending growth is set to remain contained. The 32% y/y annual jump in housing finance commitments to investors marked the largest rise since 2017 and suggests that investor lending will soon grow faster than the measly 0.2% y/y rise in February. But that increase is smaller than for other housing loan categories and coming off a very low base so investor credit growth is unlikely to exceed 5% this year.
- A stronger pick-up is possible though. For one thing, banks have significantly accelerated and simplified their mortgage approval process over the last couple of years. What’s more, a vote in the Senate on repealing “responsive lending” legislation is due in June. While the government has delayed the vote as it is scrambling to secure sufficient votes, a repeal would probably result in looser lending standards.
- Given that the new capital regime won’t kick in for another two years, APRA would need to use other tools to rein in riskier forms of mortgage lending. These could include either a direct cap on the growth in investor lending similar to the one launched in 2014 or restrictions on LTVs ratios.
The obvious next step is very easy. We don’t need complex LVR caps or any other esoteric tightening. All Byers needs to do is reverse what did in 2019, and lift the mortgage lending buffers that he so fulsomely cut to reboot the bubble immediately post-HRC. This had house prices flying back well before COVID.
If he does so he can prove his credentials as an independent regulator.
If not then we’ll all know why.