If the recent discussions about a possible crackdown on lending turn into a reality, single-income borrowers will be the most affected.
Pete Wargent, cofounder of BuyersBuyers said that plans to target the higher-debt to-income lending would be detrimental to single-income earners planning to enter into the housing market.
“Single-income earners might find that they can’t borrow as much next year, which will make life tricky for those struggling to get into the housing market,” Mr Wargent said.
“Similar strategies have been tried in other markets, such as the UK, but the results were mixed. For example, there was a sharp increase in joint income borrowers, and a marked decline in first-home buyers on a single income.”
Wargent suggested that setting a debt-to-income limit would likely help to reshape mortgage markets, since accessibility would likely be reduced for first-time buyers and single-income earners.
“The benefits to financial stability are up for debate, but it’s very likely that such a move would knock more first homebuyers and single income earners out of the market, at the expense of higher-income upgraders and joint income loan applicants,” he said.
According to the Australian Prudential Regulation Authority’s (APRA), 21.9% of all new mortgages were originated from borrowers who have a debt-to-income ratio of more than six. Since the third quarter 2020, this share has increased.
Owner-occupier lending increased by 0.7%, or $9.1bn, in August. Investment housing lending has increased 0.4%, or $1.1bn.
What regulators are most concerned about
The Council of Financial Regulators (CFR), in its quarterly statement, expressed concerns about medium-term economic risk due to the faster pace of household debt growth than income.
“Housing credit growth has picked up in the first half of this year, both among investors and owner-occupiers. Although transactions and new listings have decreased in recent lockdowns,” the statement stated. However, prices are still rising steadily in most markets.
CFR reported that APRA will publish an information document on its framework to implement macroprudential policy in the next few months.
The International Monetary Fund recently recommended tightening macroprudential policy to address Australia’s steadily increasing financial stability risks.
IMF stated that “while the increase in housing prices is largely driven by owner-occupiers taking full advantage of low mortgage rates, fiscal support programs, and low interest rates, high debt to income mortgages are on a rise amid elevated household debt and investors demand has started to rise from its low levels.”
Michelle Bullock, RBA assistant governor, expressed similar concerns earlier. Michelle Bullock stated that the RBA’s previous policies no longer apply because the risk sources have changed.
Ms Bullock stated that unlike in 2017, this time the concern is not about specific types of lending, such as interest-only or investor lending.
“This suggests there should be a need to use so-called macroprudential instruments to address rising risks. They should target high-indebted borrower risks.”
Ms Bullock believes that addressing the serviceability of loans as well as the maximum amount of credit that individual borrowers can obtain is the better solution in today’s market.
“A high level of debt could pose risks to the economy in the event of a shock to household incomes or a sharp decline in housing prices,” she said.
“It is these macro-financial risks that warrant close watching. Whether or not there is need to consider macroprudential tools to address these risks is something we are continually assessing.”