The good and bad of APRA’s loan attack

APRA’s move to cut back on the size of home loans, especially to investors, and to take some heat very marginally out of the property market can be – very slightly – applauded and more heavily lamented at the same time.

Yes, APRA is acting, well, prudentially – the ‘P’ in APRA – to head-off or at least limit risks to financial stability from the surging property prices and the resultant increase in the size of home loans.

APRA’s prime focus is to avoid another financial crisis like 2008, but this time, one that would be homegrown by potential surging home loan defaults rather than being imported from Wall St.

But I’ve added the qualification of “very slightly” to the applause, because it can be argued APRA is jumping at shadows – the idea mass defaults from home loans borrowers could send banks toppling.

The simple fact is we have never had a crisis in the banking system caused by massive defaults among individual home loan borrowers – which, until this century, were almost entirely owner-occupiers.

Not even when interest rates went to 18 per cent in 1990 and threw the country into Paul Keating’s “recession we had to have”.

Yes, those high rates triggered massive defaults and billions of dollars of losses for the banks – and, yes indeed, did bring some of them perilously close to collapse.

But the losses were among property developers and on commercial building loans; there was no threat to either any individual bank, far less to “the system”, from ordinary home loan borrowers.

Now, yes, this time it “really is different”; for three broad reasons.

There are far, far more (riskier) investor borrowers. The loans are much bigger in both absolute and relative (to income) terms.

And bank lending rates are worked off this never-before-seen – or even previously remotely approached – zero policy interest rate.

But is that enough to justify, far less endorse what APRA has done?

Simply, is it really necessary?

And indeed, would it work anyway?

Previously, banks had to “stress test” borrowers that they could handle an interest rate 2.5 percentage points above their actual borrowing rate.

Now the stress test goes to 3 per cent.

So if you are borrowing at 2 per cent, you had to be able to handle repayments if the rate was jacked up to 4.5 per cent; now the test is 5 per cent.

Yes, as APRA head Wayne Byers said, the shift was pretty marginal.

But it could be the margin which keeps someone out of getting their first home.

It will certainly hurt some potential buyers by adding yet another brick in the wall that’s barred them getting into home ownership.

On Wednesday, a potential buyer might have faced the depressing reality of turning up at an auction able to borrow enough to add to their deposit to bid up to, say, $700k – or $1.1m in Melbourne or Sydney – only to see the property sold to someone else for, say, $730k/ $1.2m

Tomorrow, “that house” might be sold at the $700k/ $1m – at which they should have been able, finally, to get into a home – but now, thanks to APRA, they can only marshal a tantalisingly inadequate $675k/$950k.

The second big point is what the heck business is it of APRA to be a nanny to both banks and borrowers, if silly lending by the bank and silly borrowing by the borrower could end up losing both of them money?

That is to say, if such potential losses could not be a threat to the system?

Especially when such absurdly artificially low rates are inflating house prices to the great unearned benefit of existing property owners?

And forcing borrowers to really stretch to buy a house?

And it’s always willing borrower meeting willing lender?