Are Australian capital city house prices sustainable? Do they pose a systemic risk to the broader economy? Is APRA concerned that Australian households are vying with Switzerland to claim a gold medal in the global consumer-debt-to-GDP sweepstakes?
The recent data from the Bank for International Settlements is alarming, showing Australian households carrying an average of 123% debt-to-GDP.
In the measured language so well honed by prudential regulators, Byres said the risks in the Australian property market were among APRA’s highest priorities.
He said Australian housing had entered a high-risk phase due to a range of factors, including capital city house prices, household debt levels, record low interest rates and anaemic wages growth. APRA, ever vigilant, was taking action to intervene in the market to ensure that banks were not taking on excessive risks and exposing the broader economy to unnecessary systemic risks.
“The whole issue of housing and property is a big issue on our agenda. There’s a lot of discussion at APRA and a lot of discussion at the Council of Financial Regulators (with Treasury, the RBA and ASIC) about the risks. We’ve never hidden behind the fact that we are in an environment of heightened risk. Prices are high, household debt is high, interest rates are at historical lows, interest rates are low and competitive pressure is strong in the housing market. So everyone needs to be fairly careful about how they operate in this environment,” Byres said.
Nick Xenophon, the South Australian senator, wasn’t having any of it. With supportive grenade lobs from Greens senator Peter Whish-Wilson, he pressed Byres for a concrete answer to one simple question: at what point will housing debt levels trigger alarm bells at APRA?
“Do you consider that there is a point where at which the ratio of household debt to GDP becomes problematic in this country?” Xenophon asked. “Is it 200%?”
Earlier in the week John Fraser, Treasury secretary, had refused to provide a number.
“He’s a wise man,” quipped Byres, realising where this was heading.
The truth is, though few want to admit it, APRA’s alarm bells have been ringing for years. It would be an imprudent prudential regulator who suggested otherwise. The regulator’s responses simply haven’t worked.
More than two hours into the appearance Byres finally said it: alarm bells were ringing, albeit “softly”, over the accumulation of risks in the banking system.
“I’d say they’re [alarm bells] going off softly. That’s why we’ve been intervening in the sense that …” Byres said, before being cut off by questions from a feverish chamber.
It was the committee’s gotcha moment. And it went largely unnoticed.
In recent years APRA has taken a number of tentative steps, jokingly referred to in the industry as “macroprudential lite”, to constrain the irrational exuberance in the property market. It’s imposed higher interest rate buffers for loan serviceability assessments, set benchmarks for year-on-year growth in investor lending and most recently took steps to constrain interest-only investor loans.
The regulator has been hamstrung, however, as these measures apply on a nationwide basis and APRA is reluctant to cripple lending in resources-linked markets such as Perth and Darwin. Behind the scenes it’s also worried about driving borrowers into the shadow banking sector, which takes lending activity outside APRA’s regulatory remit.
Despite these challenges, the message from the handful of bellicose senators last night was clear: something needs to be done about housing market risks and APRA needs to be a core part of the solution.
Some of the tools that need to be considered are hard macroprudential caps (the type the major Australian banks have been operating under in New Zealand) and lending controls targeted at specific geographical areas. APRA already has powers to impose the former and, in the wake of the latest Budget, it will soon have explicit powers to do the latter.
The politically unpalatable subtext to this discussion is that, if there is a “property calamity” in Australia, taxpayers are ultimately on the hook for these long-term regulatory shortcomings.