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Bubble Busting: Macroprudential policies for home loans explained; Stress test, Capital add-ons, Follow Kiwis on loan-to-valuation caps
Topic Started: 3 Oct 2014, 09:15 AM (2,802 Views)
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Bubble-busting: 'macroprudential policies' for home loans explained

October 2, 2014 - 6:55PM
Misa Han

The Reserve Bank could use tougher rules governing bank loans to take the heat out of the housing market, after indicating it may take steps before the end of the year to crack down on risky lending.

Policy makers are looking for ways to keep the housing market from overheating while at the same time keeping interest rates low to help the rest of the economy - and so-called "macroprudential" measures may help them to do that.

Nationally, housing prices have grown at 9.3 per cent over the past year and investor loans now make up nearly half of new housing loan approvals. With interest rates forecast to remain on hold until at least 2015, there has been plenty of discussion in economic circles about whether the RBA needs to open its "macroprudential toolbox" to tackle risky lending.

Broadly, the macroprudential measures under discussion refer to tougher rules on housing loans. They would be designed to stop banks making the riskier loans which can fuel any housing market bubble and subsequent crash.

But such measures can be implemented in different ways, with different effects on the market.

Only six weeks ago, Reserve Bank chief Glenn Stevens derided macroprudential policies as the "latest fad".

But last week the RBA's Financial Stability Review confirmed the central bank was talking with other regulators, including the banking regulator the Australian Prudential Regulation Authority, about steps to crack down on risky lending.

That message was reinforced again on Thursday, with RBA assistant governor Malcolm Edey telling a Senate committee there will would more to say about the discussions with regulators in "due course".

Indeed Edey indicated that there might be changes before the end of the year.

While an apparent about-face, the change in RBA's stance has come with plenty of warning as house prices and investor interest rose.

Possible options

'Stress test' (most likely)

A bank would be required to challenge a borrower's ability to repay a loan if the interest rate rose higher. Some banks already 'stress test' borrowers, regardless of any intervention.

The advantage of this measure is that it directly targets the source of risk to the financial system, namely the boost to demand for property and credit flowing from the low interest rates, while still ensuring borrowers benefit from those lower interest rates.

Capital add-ons (most likely)

This would require banks to hold more capital against interest-only loans, in the hope that banks would then seek to charge higher-risk borrowers higher interest rates.

The RBA noted some of the disadvantages include "small effect on borrowing costs", "slow speed of implementation" and "risk of leakage outside the prudentially regulated sector", meaning the flight of borrowers to less regulated, non-bank lenders.

Follow the Kiwis on loan-to-valuation caps (unlikely)

This could mean a customer may need to put down a minimum level of deposit set down by the central bank before they can get a housing loan.

The Reserve Bank could follow New Zealand's lead and impose limits on bank mortgages based on loan-to-valuation ratios, known as "LVR caps".

Read more: http://www.smh.com.au/business/the-economy/bubblebusting-macroprudential-policies-for-home-loans-explained-20141002-10ozww.html
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RBA eyes limits on housing investment, but coy on details at Senate hearing

October 2, 2014 - 5:47PM
Gareth Hutchens and AAP

The Reserve Bank of Australia's head of financial stability Dr Luci Ellis, and assistant governor, financial system Dr Malcolm Edey appear before the Economics References Committee, at Parliament House in Canberra.

The Reserve Bank of Australia's head of financial stability Dr Luci Ellis, and assistant governor, financial system Dr Malcolm Edey appear before the Economics References Committee, at Parliament House in Canberra. Photo: Alex Ellinghausen

New regulations to curb some of the investor froth in the housing market look set to be introduced before the end of the year.

Assistant RBA governor Dr Malcolm Edey told a Senate committee on affordable housing on Thursday that the RBA was concerned about the amount of "excessive speculative activity" in Australia's residential property sector.

He said the RBA had frequent talks with the Australian Prudential Regulation Authority on the issues and said a policy response was firming.

"I expect there will be … an announcement before the end of the year," Mr Edey told senators.

The revelation comes as concerns mount about the runaway growth in investor finance, which the RBA says has been "significantly outpacing" the growth in household incomes in recent months.

The RBA says that investor activity has been driving house prices higher in recent months.

National house prices have risen by 10 per cent in the last year, but by 12 per cent in Melbourne and 15 per cent in Sydney.

But Mr Edey said that Australia's financial regulators would not try to kill the investor market with a so-called macroprudential policy response, which would tighten rules around lending.

Rather it would aim to address imbalances compared to the rest of the sector.

However, senators wanting a peek into the central bank's macroprudential tool kit were disappointed.

Mr Edey was reluctant to detail specific tools that might be used, refusing to "rule anything in or out".

A response would be determined by APRA, the banking watchdog.

"The tools we are talking about need to be carefully targeted," is all Mr Edey would tell the committee.

Loans to investors currently account for close to 50 per cent of new housing loan approvals.

With approvals rising by 90 per cent in the past two years for loans in NSW, the RBA believes this market activity is becoming "unbalanced".

Read more: http://www.smh.com.au/business/property/rba-eyes-limits-on-housing-investment-but-coy-on-details-at-senate-hearing-20141002-10p44e.html
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vdmruss
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MB got their Christmas present.

I still think we should be doing more on the supply side of things, scrapping existing incentives, shutting down NIMBY-ism and giving FIRB a few firm slaps.
Let me assure you that this isn't one of those shady pyramid schemes that you've been hearing about. No sir, our model is the Trapezoid which guarantees each investor an 800% return within hours.
Those who can, do. Those who can't, teach.
"It's an itchy blanket, it's designed to remind you how lucky you are"
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Dr Watson
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vdmruss
3 Oct 2014, 09:50 AM
MB got their Christmas present.
Interestingly, if the approach taken is not LVR controls, but higher repayment buffers, it will be the approach proposed by Peter Fraser, not David Llewellyn-Smith!
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
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Stan
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Let's not forget that any implementation can be wound back in the event of a falling market.
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Stan
3 Oct 2014, 10:05 AM
Let's not forget that any implementation can be wound back in the event of a falling market.
You mean like negative gearing for one.

This.is now sucking 15 billion from the economy every year, that ponzi has got out of hand and is now an extreme hinderance to the economy. Yet only the other day I here how they are making under30's who have lost their job have to wait six months to recieve unemployment benefits, to save something like 1.3 billion over four fucking years. Let people go hungry so some wealthy investor can own another investment property not to mention so the rich foreign investors can buy another ip and let our own starve.

So let's get this straight, we let the less fortunate and less wealthy in our society starve and go without shelter, so the government can save 1.3 billion over four years. Instead of remove negative gearing, and save 60 billion over four years. Who are we helping here and who and we hindering here, helping foreignors to hinder our own. This government should be shot.

Watch the rents collapse even further when they try and scrap this ponzi pumping measure, another reason our property is far more a bubble than the US or euro EVER was, negative gearing.

Negative gearing will end up putting itself out of existance and will will eventually become a dirty word for generations to come.

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Ex BP Golly
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Stan
3 Oct 2014, 10:05 AM
Let's not forget that any implementation can be wound back in the event of a falling market.
Your sounding a little desperate there Dr Watson
WHAT WOULD EDDIE DO? MAAAATE!
Share a cot with Milton?
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b_b
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vdmruss
3 Oct 2014, 09:50 AM
MB got their Christmas present.

I still think we should be doing more on the supply side of things,
200k dwellings per annum - near all time record high - not enough?
(S – I) + (T - G) + (M - X) = 0
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A Lurker
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It always works out so well when government tinkers with markets. Their objectives are pretty much always delivered to the dollar.
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Dr Watson
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Ex BP Golly
3 Oct 2014, 02:12 PM
Your sounding a little desperate there Dr Watson
Me? No! I'm more than happy for the RBA to point the finger at APRA and APRA to blame the ATO and so on. Nobody wants any responsibility. They'll go round in circles and turn up with a wet lettuce leaf. It'll make for fine entertainment. But the only solution to our housing affordability problems, as I've said before, is to cut immigration or to build more centres of commerce. A wet lettuce leaf from some public servant is, at the end of the day, only a wet lettuce leaf.
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
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