APRA moves to ration credit for home lending — but it’s not about affordability

Prudential regulators moved this morning to tighten “macro-prudential” controls on lending — the Australian Prudential Regulation Authority lifting from 2.5% to 3% the interest buffer it wants banks to use when assessing how much borrowers can safely service.

“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building,” APRA chair Wayne Byres said.

The move has nothing to do with housing affordability — but because of our media myopia about property it will be seen entirely through that lens.

It will have little impact on housing affordability except to reduce the amount of money first-home buyers can borrow or force them to increase their deposits. To the extent such credit-rationing does that, it increases inequality by enabling high-income buyers to acquire more assets.

As Reserve Bank governor Philip Lowe said in a speech last month: “Society-wide concerns about the level of housing prices are not best addressed through increasing interest rates and curbs on lending. While monetary policy is contributing to higher housing prices at the moment, the way to address these concerns is through the structural factors that influence the value of the land upon which our dwellings are built. The factors include: the design of our taxation and social security systems; planning and zoning restrictions; the type of dwellings that are built; and the nature of our transportation networks. These are all obviously areas outside the domain of monetary policy and the central bank.”

The recent experience of the Reserve Bank of New Zealand illustrates this: it has tightened its macro-prudential policies three times so far in 2021 and the NZ housing market continues to surge, showing how hard it is to get lending controls right even when a government has moved to address tax policy as well.

Macro-prudential controls helped make the financial system more stable here from 2014 to 2017 via a crackdown on interest-only loans, especially for investors. That led to a brief lull in price growth before it resumed with a vengeance last year.

The issue here has become tangled up in suggestions for the RBA to be reviewed — which ideologues and inflation hawks have seized on to urge a tighter monetary policy, often using rising house prices as evidence that monetary policy is too loose.

The irony is that many of those economists and commentators — usually in the pages of The Australian Financial Review — who are calling for some kind of overhaul of monetary policy have supported some of the most powerful disinflationary forces of recent years — curbs on government spending, industrial relations deregulation and wage cuts, high temporary immigration that has forced wages down — that have guaranteed the RBA has struggled to meet its inflation mandate of 2-3%.

Few of them were to be found cheering on Labor’s attempts to reduce tax incentives for housing investors either, despite the benefits that would have had.

And few have backed the RBA’s goal of lifting interest rates only when wages growth is strong enough to push inflation back into its target band. It likes wages growth right where they are, thanks — below inflation, so workers endure real wage cuts.

When the Reserve Bank says, as it did after its October meeting yesterday, that it “will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently”, they’d rather move the goalposts so the RBA lifts rates now.

And that will have very real consequences for housing affordability.