The New Lending Curbs Might Be Permanent

When the Bank of England says its version of APRA lending curbs will be part of the structural feature of the British housing market, you can count on that meaning it’s likely to be permanent. So, are the APRA lending curbs going to be permanent?

The growing risks in what is being called a global ‘debt binge’ has gotten attention from central bankers, which has resulted in the new ‘structural feature’ of APRA lending curbs.

Philip Lowe, RBA governor, has repeatedly warned against the problems that result in an inefficient debt-to-income ratio that has now risen to 190 per cent in Australia.

Mark Carney, Bank of England governor, sent words of caution regarding increased consumer credit and debt and the practices of relaxed mortgage lending.

For these primary reasons, banks have taken it upon themselves to use protections against bad loans by looking for billions of pounds of extra capital. The United Kingdom reintroduced the countercyclical buffer at 0.5 per cent and that is expected to rise by 1 per cent in November.

According to Mr. Carney, the risks are always changing and growing, which means the job of protecting against bad loans is never done. The major banks are being widely capitalised with a tier 1 ratio of 15.7 per cent.

The concept of more banking regulations has become heightened across the UK and Australia since 2014, when government regulations and policies were instituted to offset the housing market risks.

Banks in the UK felt compelled to assess whether their borrowers could still afford their mortgages if they raised the cash rate by 3 per cent. This week, the Bank of England announced that it “…now expects these insurance measures to become structural features of the UK housing market.”

They aren’t saying how long these APRA lending curbs are expected to last, or when the risks are predicted to be reduced or eliminated for the domestic housing market.

Shane Oliver, AMP Capital’s chief economist, feels these APRA measures, or at least some of them, will be permanent.

“I suspect that as time goes by they will likely become a permanent feature because of the control over risky behaviour that they allow over and above that achieved by varying interest rates and because the regulatory framework necessary to administer them will become more entrenched,“ said Mr. Oliver. He also said, “This will particularly be the case the longer the interest rate environment remains constrained – and in Australia’s case it’s hard to see a rate hike for the next year or two.”

When macroprudential (an approach to financial regulation that mitigates risk to the whole financial infrastructure) measures first went into effect in 2014, they were viewed as a second-best substitute – a bandage – to hikes in the interest rates where the economy as a whole didn’t support the higher rates.

Since 2014 things have changed as house prices continue to grow, which adds to the housing affordability issues affecting Australia today.

Shane Oliver says he thinks that APRA’s mortgage curbs are likely to become progressively more attractive from the aspect of social policy, as they can alter the course of lending for non-first-time home owners and occupiers.

He says the other reasons APRA’s measures are likely to be permanent is due, at least in part, to higher household debt and poor affordability – and neither of these issues are likely to change anytime soon.

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