For all the talk from Liberal Party backbenchers about house prices and housing affordability, their words are just hot air and nothing more. Across the Tasman, the Reserve Bank of NZ, with the approval of the Ardern government has formalised the use of a borrower’s capacity to meet the debt – the serviceability of the loan – as a major consideration for lenders.
That’s unlike Australia where the key regulator, APRA, is sitting and watching and while it’s ‘talking’ to the banks to keep them on track, it’s not being as aggressive as the RBNZ in trying to control the rise in house prices and demand.
Controlling house prices here has become a political issue – not one for regulators. Politicians don’t want anything done to rock the boat by looking at questions such as equity and affordability because it seems everyone wants to bask in the glow of the ‘wealth effect’ from rising house prices
So all the sitting, watching and not finding anything untoward in lending activity, while decrying the re-emergence of the most destabilising group of all, self-managed super funds and their greedy owners – is adding nothing to the quest for solutions, other than waiting for an almighty crunch.
The Ardern government has already directed the RBNZ to have regard to house price sustainability when examining issues such as financial stability. They elevated the issue from being a sit and watch the market and occasionally fiddle with policy changes as Loan to Valuation Ratios (LVR’s).
The Ardern government is also legislating to remove investors from the housing market or make it more expensive for them to play.
In a statement on Wednesday, the RBNZ said it had added debt servicing as a key part of its ’toolkit’ with the agreement of the Minister of Finance who had also requested more information and analysis on debt-to-income ratios and interest-only mortgages.
“Our analysis detailed that debt serviceability restrictions, such as a Debt-to-Income (DTI) limit, are likely to be the most effective additional tool that could be deployed by the Reserve Bank to support financial stability and house price sustainability,” The RBNZ said in its statement on Wednesday.
“The analysis also demonstrated that any such restrictions would impact investors most powerfully while having limited impact on first home buyers.
“In our advice we also noted that we consider that a DTI limit would be a complementary tool to mortgage Loan-to-Value Ratio (LVR) restrictions as they address different dimensions of housing-related risk; DTIs reduce the likelihood of mortgage defaults while LVRs largely reduce losses to banks if borrowers default.”
The RBNZ said the Minister had “agreed in principle to add debt serviceability restrictions to the MoU, on the condition that any implementation is designed to avoid impact, as much as possible, to first home buyers. We will now work with the Treasury to update the wording for the MoU (Memorandum of Understanding between the RBNZ and the government), which will need to be approved by the Minister.”
“Although we do not have a remit to target house prices directly, our financial policy tools can help to ensure prices do not deviate too far from sustainable levels,” Reserve Bank Governor Adrian Orr said in the statement.
In Australia a similar scheme would have to come from APRA (after discussions with the rest of the Council of Financial Regulators – ASIC, the RBA and Federal Treasury).
Banks and home lenders in Australia have been told to ‘know your customer’ and that includes a more granular examination of income and debt servicing ability based on income and expenses of the borrowers.
That has led to complaints about delays in approving or knocking back home loans, especially from the big banks and the emergence of lenders (such as Macquarie) claiming quick approvals, with all the risks those claims carry, but are not acknowledged by the breathless boosterism of such offers.
Australian micro-prudential controls in housing are less formal than across the Tasman and something ‘mysterious’ and known only to bankers and regulators.
But you have to wonder why Treasury and Treasurer Josh Frydenberg haven’t thought of an idea like the latest one from the RBNZ to try and assuage the growing concerns about house prices and affordability.
After all it would not impact the politically touchy issues of capital gains, negative gearing deductions and borrowings by self-managed super funds (which is the financial stability issue of the future in Australia).
The RBNZ’s tougher LVRs announcement in February was aimed squarely at investors as was the Araden government’s move to legislate to remove them from the great housing race.
Here in Australia its silence on affordability, equity and the return of investors (who helped destabilise and end the previous boom five to six years ago.
