Petrified APRA still plays Nanny

WAYNE Byres, the boss and intellectual driving force of APRA – the regulator charged with ensuring our banks don’t go broke – has at least finally got halfsensible about the ‘stress test’ banks should apply to potential home loan borrowers.

He’s also at the same time made it crystal clear that like all his fellow regulators he’s petrified – perhaps, more politely, gun-shy – in the wake of the Hayne Royal Commission.

He doesn’t want to get another mauling for ‘underregulating’ – so he’s going to stick with the ‘over-regulating’ which will supposedly ‘save’ borrowers from themselves.

APRA’s no longer going to require banks must test that a potential borrower can keep servicing a home loan if the loan’s interest rate goes to at least 7 per cent.

That’s big of him and APRA. But, goes to 7 per cent? Try soars. And soaring directly against a whole series of rate cuts that are about to arrive.

The average variable home loan rate is around 4.5 per cent and some – many – fixed rate loans are available at sub-4 per cent.

But, with the RBA about to cut its official rate by 25 points (all of which will be passed on), and with maybe another 25-point cut coming immediately in July, in which decade did Byers think there was any serious prospect of that variable rate going anywhere near 7 per cent?

OK, so at least he’s ditching the fixed 7 per cent minimum. But what’s he going to replace it with?

That the banks in future set the buffer at which they assess the borrower’s ability to keep paying at 2.5 percentage points over their actual home loan rate.

You gotta love APRA’s classic regulatory – “it’s actually up to each bank what margin it decides, except that it must be at least that 2.5 per cent”.

So if the loan rate is

4.5 per cent, the borrower still has to be able to keep paying at the previous 7 percent. All bluster from APRA and no change.

But if loan rates fall to 4 per cent in the next couple of months (thank you RBA), then the next borrower gets to be able to borrow if they can service 6.5 per cent.

But what about the first borrower? They are stuck with being over-regulated and over-protected.

And a lot of people will be prevented from buying a house because a gun-shy APRA feels it has to play Nanny. It does so lest some future Hayne-style RC blames it for under-regulating; and blames banks from making commercial decisions – some of which result in loan losses.

In the ever-more Nannystate world, borrowers must be protected from themselves – they and banks cannot be trusted to make a simple decision in their own shared best-interests.

Could Byres think about a world in which home loan borrowing rates went up 300 points from where they are about to be?

First, it’s not going to happen anytime soon – like the next 3-5 years.

Secondly, if it did, we would either be in an inflationary surge we haven’t seen for nearly 30 years and/or property values would be soaring.

In either outcome, anyone borrowing to buy a house now would have built up a lot of equity in their property and/or their much higher incomes would be comfortably servicing higher repayments.

But anyone who’d been ‘saved’ from the ‘risk’ of that reality by being denied a home loan now would have been neatly screwed by the gun-shy APRA.

In that future, that denied-borrower would be contemplating much higher property prices – have a chat to anyone who got ‘saved’ from buying a property 10 years ago. While they would also be paying higher rent.

The way to achieve responsible lending is to promote sensible lending – where banks properly assess borrowers, in their own-best interests. And banks are kept honest by competition, not over-regulation.