Why macro-prudential mortgage curbs are needed now

REA’s Cameron Kusher believes that now is not the time for the Australian Prudential Regulatory Authority (APRA) to implement macro-prudential restrictions on mortgage lending:

While prices have risen rapidly since the onset of the pandemic, growth has been much more benign over recent years having increased by 33.2% in total over the past five years, with 19.7% of that 33.2% growth occurring over the past 12 months alone. In this context, price growth over recent years in Australia has not been particularly strong… right across the world property prices are increasing rapidly…

A deterioration in lending standards is something both the RBA and APRA are watching closely for, but say it’s not something they are currently seeing…

This is not to say a rapid run-up in prices is particularly desirable because it only benefits those who own properties; however, nor does it mean that regulators should, at this stage, step in and put a stop to these price rises, especially if there is no sign of deteriorating lending standards.

While calls for macroprudential intervention will continue to grow as prices continue to rise, the RBA and APRA should resist these calls for the time being, unless of course there is meaningful deterioration in lending standards…

This isn’t to say the RBA and APRA shouldn’t continue to closely to monitor lending standards; however, it would be a mistake to introduce macroprudential policies too soon just because property prices are rising rapidly, as this could lead to a slowdown in the domestic economy’s performance.

I disagree and believe that APRA should implement some form of macro-prudential mortgage curbs sooner rather than later.

First, CoreLogic data to March 2021 does show that lending standards have deteriorated, with the proportion of interest-only, high loan-to-income and high debt-to-income mortgage lending rising substantially:

Deteriorating lending standards

Deteriorating lending standards.

The situation likely worsened over the four months to July.

Second, new investor lending has accelerated this year and is now tracking near prior peaks when macro-prudential curbs were implemented by APRA:

Australian mortgage demand

Investor mortgage lending heating up.

Third, the growth in dwelling values is extreme and broad-based, easily surpassing previous peaks:

Property price growth

Extreme property price growth.

Instead of letting property prices and mortgage debt levels inflate even further, APRA should get on the front foot and take macro-prudential action now. What is the benefit of waiting?

Unconventional Economist


  1. Reus's large MEMBER

    Are you still banging on about MP, it has been, what maybe 10 years now and they have not ever once willingly implemented MP, it was only under duress after the RC that for a short time implemented some tinkering with the edges rules and quickly relaxed those when the heat died down.

    MPLOL !

  2. pfh007.comMEMBER

    Folks calling for MP keep forgetting that we abandoned government controls over how credit is allocated decades ago because holy free market scriptures promised that “market knows best”.

    The only thing that concerns APRA is financial stability of credit providers and that is a non issue because the RBA stands ready to buy up whatever assets they need to sell if the need arises and the government is on a permanent war footing when it comes to goosing house prices.

    There is no financial stability risk.

    If anyone is serious about introducing some public policy direction to the allocation of credit because they think we are misallocating scads of capital into the existing housing stock they should start talking Turkey and stop fluffing around with MP.

    But if they do they will be laughed at by the banking sector and their political lackeys who understand why the current model is sooooooooooooo good.

    • I must admit I struggle with this “Misallocation of Capital” idea.
      How can it be misallocated?
      Seriously, it’s like talking about the misallocation of water mid way through a once in a 100 year flood
      Misallocation assumes that there is a better way to deploy this capital. Personally I don’t know of any investment strategy which produces higher returns (for the individual) than mortgage leveraged RE, there’s 40 plus years of up up and away history backing these RE bets in Australia. We would have over 30% of the population instantly bankrupted along with all our banks if rational pricing was to ever return to the RE market. On top of this we have an economy structured to develop Infrastructure / Construction and practically nothing else.
      This second point (and practically nothing else) is of vital importance because for capital to be Misallocated there must be other “better” ways to use this capital, I just don’t know of any, nor do most other Aussies therefore there is no misallocation.

      • pfh007.comMEMBER

        dodgy as,

        You have point if we limit the discussion to allocations within a system that drives allocations of capital to certain purposes.

        From that perspective there is no misallocation of capital as capital is being allocated having regard to the current incentives.

        When I use “misallocated” I am having regard to a policy environment where driving capital into the prices of existing assets is not the priority but instead the priority is to encourage capital to be allocated to the creation of more productive capital assets.

        Of course we could then debate what is a productive asset and I will agree that at the margins there is some grey there as well but I believe there is plenty of low hanging productive fruit before we need to worry about the finer points of what is productive.

        For example:

        Capital Gains Tax policy that preferences investment in new housing stock (say by making the investment in new housing CGT free for the first owner) rather than investment in the existing housing stock will produce more new housing rather than simply a rise in the price of the existing housing stock.

        • Ah so if I understand you, you’re wanting the available capital to be preferentially allocated in such a manner as to achieve some social (some might even say Socialist) or community agenda (in your example, additional housing stock) now that’s interesting, but it does put us on the slippery slope towards a “planned economy” and I don’t know many of that want that outcome.
          Maybe it’s the very concept of “Productive Capital” that is flawed.
          Now don’t get me wrong, I’d love to be part of an economy where skilled Aussies created unique high value widgets which the rest of the world simply couldn’t live without. That’d be a fantastic world but it’s also a fantasy world. The worlds widget make scene simply doesn’t need additional supply sources, especially not new production sources that are far removed from existing component supply chains….ah that’d be Unproductive and from that sense definitely a “misallocation of capital”
          So what’s left for Aussies to invest in?

          • Display NameMEMBER

            Capital IS being allocated to specific outcomes at the moment. These are choices historically made and tuned along the way. Laws and regulations are clearly made by people and I would suggest the current set have been made and tuned for specific outcomes we see at the moment. Not to suggest a conspiracy, but the people who get a say in these things I would suggest have influenced the nuance of the law to favour outcomes that they want. There may be elements of unintended consequences but that’s what regulators are for 🙂

          • @Display Name yes, capital has been allocated deliberately in the past, everywhere and most recently in asia see here for the blueprint applied again and again:

            “How Asia Works: Success and Failure In the World’s Most Dynamic Region”

            At our stage of development we need ‘moral’ mechanisms to keep capital allocators accountable for their mistakes as described below. Allowing them to be unaccountable, corrupting politics to entrench moral hazard, and then supercharging their WMDs with unlimited printed money is an abomination explaining the nonsensical world we now occupy.

          • How about Atlassian, as an example? That is no fantasy. An extremely successful tech company started in our own backyard. They IPO’d ~$A10bn a few years ago, and have since provided 10x returns.

            Unfortunately, they couldn’t raise the measly $10b in Oz, so they listed in the US on the Nasdaq.

            How’s that? A productive, high growth company, can’t raise $10b in Oz…. but we have an $8 TRILLION housing market, built on consumption draining credit.

            So yes, in my view, capital is clearly being misallocated. I’m open to any flaws my logic though.

          • @Rick
            Hey Trust me I’m normally the first one to scream what about Atlassian
            But here’s the thing Atlassian will never employ anything like the number of people that worked at Holden in Geelong, they’ll never even employ as many as our Mining sector, Sure if we had a thousand Atlassian’s than the Aussie economy might look a little bit more like the Californian economy but we don’t have a thousand we have one.
            Our capital structure today also makes it unlikely that we’ll get any more high tech darlings. Atlassian was born also in a very different capital environment and a very different Australian economy, housing was unaffordable but it wasn’t completely insane. Engineering still existed as a respectable job and UNSW was still a global highly regarded Engineering school (esp electrical) (Martin Green’s PV solar work was world beating)
            That’s not todays environment.
            If Atlassian were starting out today my guess is that they’d be a Fintech company. They’d be focused and some aspect of leveraged capital doing a sort of modern-day high speed traded LTCM or maybe a Rentech knock off.

          • pfh007.comMEMBER

            dodgy as,

            “..Ah so if I understand you, you’re wanting the available capital to be preferentially allocated in such a manner as to achieve some social (some might even say Socialist) or community agenda (..”

            Nope I did not say that.

            Some might say that not imposing a capital gains tax is about as anti-socialist as you can get.

            But you are forgetting that we are currently in an environment where massive policy choices are being made to preference investment in existing housing asset prices so if you are concerned that public policy that directs capital to particular outcomes is a slippery slopes to communism, the tanks have been rolling for decades.

            My argument is that the solution to the capital misallocation by the private bank cartel is to open up access to deposit accounts at the RBA so everyone has access to highly liquid and safe assets and those who think they are good at spotting investment opportuntieis can live and die by the sword.

            You can hardly argue that our taxpayer guaranteed banks can make that claim.

      • Capital misallocation requires a moral lens because you can only see what grows the pie in hindsight not empirically up front – for vitally important new ventures.

        As govt has shown it can’t successfully pick winners, the only mechanism to discourage future misallocation of capital is leaving the consequences with those responsible. This requires structural segmentation of lending markets (think glass steagall act – won from hard experience) to ring fence excessive risk taking and protect the majority of wage and salary earners.

        You then let the rest eat a bag of dicks when they fail as a matter of common sense policy. JP Morgan got sick of bailing out his mates and somehow convinced the govt to own a central bank as lender of last resort contrary to this common sense proposition.

        Under the ideal structure with no moral hazard and govt backing non-productivity enhancing lending, ‘proper’ lending and efficient capital re-allocation should enrich participants over the long run and those misallocating capital should die out without bringing the whole system down. It is not a micro but a macro solution. Once you have corrupted this the chances of a reset without significant destruction must be close to zero?

        The current path dependency is exacerbated by the ability to print fiat money, meaning change can’t be forced until the global reserve currency collapses for lack of confidence. They have the SDRs ready to go when this happens but surely we won’t have a change until China is considered a reliable global power to back such a basket of fiats? Until then enjoy the status quo… houses to the moon!

        • pfh007.comMEMBER


          “..This requires structural segmentation of lending markets ..”

          Or something even easier than that chunky bit of legislation. Open up access to deposit accounts at the RBA to the non-banks and the general public and reduce the dominance of bank credit in the public monetary system.

          That will allow a hundred capital allocation flowers to bloom without putting the public monetary system at risk every time some hopeless bank makes a series of dud capital allocation decisions.

          It will also make APRA’s job very simple.

          As a much larger chunk of the money supply is now risk free assets on the RBA balance sheet rather than bank credit, the money supply will not collapse just because someone invested in a bunch of dud investments and loans were not repaid.

          Needless to say the banks hate the idea of a much larger role for central bank deposits in the monetary system. They love their monopoly on central bank deposit accounts.


          • The current system is outdated and based on the presumption that the banks need to be used as intermediary of lending to the general public. Your solution cuts to the core of the issue and is appropriate given the current and likely future structure of banking.

            The oligopoly on banking is turning to dust and slipping through fingers as any group of kids could program a banking app and back end these days without even requiring a physical safe out back to hold the cash. Like everything in Australia, legislation and the legal system is used to retard change and retain control in the hands of incumbent power as such these kids will never get a financial services licence.

            Crypto should be terrifying incumbents but the fact they haven’t yet wiped it out makes me think it is not a credible threat. Your solution would help them retain some semblance of control with deposits held at the central bank so who knows with greater threats maybe it can force change and like so many ideas of the last decade the fringe can become the norm out of sheer desperation even if they are fundamentally opposed to giving up their uniquely privileged postition.

        • Yep the problem we have here is moral hazard (in spades)
          Our banks know full well what they’re doing
          The bank lenders know full well that Aussie bank mortgages are government backed and therefore of zero risk
          The RBA knows its place and will definitely pull out all the stops to prevent a Liquidity Crises
          So, until we flame-out it’s, Housing to the moon!
          But having said this we’re also at a turning point where most of the available Labour within most of the worlds economies is worthless, completely and utterly worthless.
          The truth is that AI and Robotics are depressing that wages of even highly skilled Engineers. A few weeks back a friend was showing off his latest Trading platform software. The AI section copied the trades of the best traders and than applied various optimization algorithms and in no time flat was besting the best.
          On the Robotics front we have large scale manufactures like Foxconn in discussion to locate a mega phone factory in any country that gives them the best deal, thing is these new mega factories just don’t need local labour.
          The social responsibilities of capital arise largely from the traditional balance of Labour/Capital within a business, minus this need, I suspect we will find ourselves exploring completely new Economic ground with completely new concepts of savings and labour value allocation.

          • Yes, no doubt. Kids came out of dangerous coal mines because of organised labour but perhaps also increased mechanisation. An african american friend similarly suggested increased mechanisation had more than a little to do with slavery being abolished rather than the moral crusade so often woven into the dominant narrative.

            People in general don’t have a strong history of making change because it is the right thing to do, history can force hands and then smart elites looking to retain control during change are quick to claim and portray a moral narrative to legitimize control.

            I wonder how automation will be ‘reworked’ as some kind of moral victory? You need a plan b, mechanized farm workers went to factories, factory workers went to white collar jobs (read bullshit jobs) where do white collar workers go next? I vote an god-like AI figurehead with a large ‘old-Tibet-like’ human priest class translating the edicts (hanging out on constant smoko, pushing the print button and reading aloud every 2 hours). 🙂

  3. Display NameMEMBER

    pfh is on the money so to speak. If the market cools too much with the lockdown dragging on, as it will, more stimulation may be on the cards. About to slide down the negative rates rabbit hole.

    • Reus's large MEMBER

      So true, given that this lockdown will continue till at least December and the traveling to view / purchase a house now being cracked down on, expect there to be neg rates and printers going brrrr and loosening of current APRA standards, not that there is much left to loosen apart from them just walking away which is pretty much all they have done so far.

  4. Hugh PavletichMEMBER

    New Zealand’s politically created housing hyperinflation circus … continues …

    … Do you have the capacity to absorb the inevitable correction ? …

    July 2021 Report – Real Estate Institute of New Zealand


    Bearing in mind normal housing markets do not exceed 3.0 times gross annual household incomes (Median Multiples) , do your own rough calculations of what normal pricing should be …

    Median Multiples – Interest Co NZ


    What lessons have been learnt from the Irish 2007 housing crash, when the Median Multiples of its metros overall went from 4.7 to 2.8 (refer Demographia International Housing Affordability Surveys – All 16 Earlier Editions at Performance Urban Planning), putting all its Banks to the wall and requiring about 70 billion euro of bailouts from mainly German financial institutions (as they had the most to lose).

    Subsequent research by the Central Bank of Ireland found that excessive debt to income was the greatest problem and consequently imposed a general mortgage debt to income cap of 3.5 …

    Mortgage Measures – Central Bank of Ireland


    House prices: Won’t someone think of the movers? … OPINION Daniel Dunkley … Stuff NZ


    … concluding …

    … Faced with the dilemma of whether to sell up first or take on bridging finance, Kiwi homeowners will be forced to accept an uncomfortable level of risk if they want a bigger home or need to relocate in the months to come.

    With many homeowners hamstrung, it’s unclear who this market is working well for at the moment, apart from real estate agents. As market conditions become more absurd by the week, people thinking of trading up might be better off staying put for now.

  5. “Instead of letting property prices and mortgage debt levels inflate even further, APRA should get on the front foot and take macro-prudential action now. What is the benefit of waiting?”
    Couldn’t agree more Leith. While MB is often a lone voice in the wilderness on this front, keep saying it.