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The Australian Prudential Regulation Authority (APRA) increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications:
In a letter to authorised deposit-taking institutions (ADIs), APRA has told lenders it expects they will assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate. This compares to a buffer of 2.5 percentage points that is commonly used by ADIs today.
Yesterday’s RBA statement (from Governor Lowe) was expected to have included some discussion on tightening macro-prudential rules sometime in the near future. It did not. And now we get this, a small step but a little action is much better than a heap of words!
The background to this is a surge in Australian home prices, especially in Sydney and Melbourne. Regulators are concerned this will lead to borrowers over-extending, and thus posing financial stability risks.
APRA is a part of Australia’s regulatory framework, this via the RBA website:
Responsibility for the regulation and supervision of the Australian financial system is vested in four separate agencies:
the Australian Prudential Regulation Authority (APRA);
the Australian Securities and Investments Commission (ASIC);
the Reserve Bank of Australia (RBA);
and the Australian Treasury.October 8 – Reuters (Wayne Cole):
“Australia’s central bank… warned that ‘exuberance’ in a red-hot housing market was encouraging a build-up of debt that might destabilise the financial system, urging banks to maintain lending discipline amid the boom. In its semi-annual Financial Stability Review, the Reserve Bank of Australia (RBA) said the banking system was generally sound and well capitalised, but a debt-fuelled surge in house prices needed to be watched.”
RBA’s Lowe:
A full employment numerical target doesn’t make sense
There are no right answers to central bank mandates
We rarely intervene in FX and haven’t for more than 13 years
We do not have an objective for the exchange rate, nor would it make sense to do so
adding an exchange rate objective to the central bank’s other objectives would severely compromise the achievement of other objectives
We have always had a flexible approach that allows for some variation in inflation
we have found a flexible medium-term inflation target works wellRBA acted to contain soaring interest rates.
The central bank this morning offered to buy $1 billion in government bonds. The offer was the central bank’s first attempt to defend its 0.1 per cent three-year yield target since February. The intervention came after the three-year rate passed 0.17 per cent. The yield promptly dropped more than five basis points.
The RBA’s mid-morning intervention on rates boosted stocks that compete with bonds for institutional investment flows – so-called bond proxies. Wesfarmers climbed 3.17 per cent, Goodman Group 1.13 per cent and Transurban 0.95 per cent. Supermarkets Woolworths and Coles added 1.64 and 0.67 per cent, respectively. CSL gained 0.41 per cent.
The major banks retreated with interest rates. CBA dropped 0.07 per cent, ANZ 0.11 per cent, NAB 0.14 per cent and Westpac 0.35 per cent.
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