ScoMo hints at easing home loan restrictions

ScoMo hints at easing home loan restrictions

9 February 2018

Treasurer Scott Morrison is “closely watching” the cooling residential real estate market and is willing to ease home lending restrictions if property values fall sharper than expected, reports the AFR.

Mr Morrison said APRA’s restrictions over the past year to control lending to investors and to cap interest only loans had been “very effective” in achieving a “soft landing.”

But he added that tighter home lending measures imposed on banks over the past year were “completely malleable.”

“The great thing about these macroprudential controls, as opposed to a structural change to your tax system, is that they are completely malleable,” he said. “You can target them, you can fine [tune] – you can pull them back, you can push them forward, you can watch them all the time.”

APRA’s 2017 measures included limiting the flow of interest-only lending to 30 per cent of new residential mortgage loans, after the share reached about 40 per cent at some banks. Stricter limits were also imposed on the volume of interest-only lending at loan-to-value ratios above 80 per cent.

In a separate report, however, the AFR noted the Treasurer’s comments puts him at odds with APRA boss Wayne Byres, who late last year said debt levels would have to come down before the restrictions were eased.

“Their removal will require us to be comfortable that the industry’s serviceability standards have been sufficiently improved and—crucially—will be sustained,” said Mr Byers in October. “We will also want to see that borrower debt-to-income levels are being appropriately constrained in anticipation of, eventually, rising interest rates.”

Weighing in on the debate, Capital Economics’ chief economist for Australia and New Zealand, Paul Dales, said: “My money’s on APRA and the RBA wanting to keep thing as they are and Scott Morrison, more for political reasons than economic ones, wanting to rejuice the housing market in a year where there’s a federal election.”

Meanwhile, a draft report from the Productivity Commission released this week found that APRA’s intervention to slow growth in interest-only loans had cost taxpayers up to $500 million a year in extra income tax deductions, said another AFR report.

Describing APRA’s policy as a “blunt intervention with detrimental effects on market competition”, the report asked why the banks had been allowed to lift interest rates on both past and future investor loans even though the policy targeted only new lending.

The Productivity Commission was also scathing of dwindling competition in the financial services sector, calling the Four Pillars policy (designed to stop mergers between the Big Four banks) a “redundant convention.”

Both the government and opposition, however, were quick to state they had no intention of allowing any of the Big Four to merge.

The intensified debate over regulatory intervention in the mortgage market comes at a time when lower-income households are experiencing greater mortgage stress.

According to ME Bank’s latest Household Financial Comfort Report, the proportion of households spending 30 per cent or more of their disposable income on meeting mortgage payments—an indicator of financial stress—stood at 46 per cent.

“Mortgage defaults may escalate if interest rates increase, particularly among vulnerable low-income households already dealing with the rising cost of necessities,” said Jeff Oughton, ME consulting economist and co-author of the report.