The macroprudential approach to easing credit growth while not spurring a shock to the housing market has “pleasantly surprised” regulators.
This is the assessment of JP Morgan chief economist Sally Auld. Speaking on a panel at the Breakfast with the Economists in Sydney on Friday. Auld joined by US chief economist for S&P Global Ratings, Beth Ann Bovino, Westpac chief economist Bill Evans, Commonwealth Bank chief economist Michael Blythe, RBC chief economist Su-Lin Ong and chair, chief economist Stephen Koukoulas.
According to Auld, the macroprudential policy has been a viable option for policy makers to ease credit growth without the need to raise interest rates.
Over the last year, APRA initiated a number of policies to limit bank lending to investors and interest-only loans, pushing the banks to rethink the quality of their loans on their book.
“APRA’s macroprudential tightening has made sense. Even the regulators have been surprised with how well it has worked,” Auld said.
“The happy ending of course would be that incomes could lift to meet potential credit growth but with wage growth expected to be benign, that won’t happen,” she said
Importantly, she added that the end result of APRA’s approach will mean better quality assets for the banks.
“Even the Reserve Bank of Australia’s Governor Phillip Lowe has been at pains to emphasise that you now need to be a good borrower to get good finance,” she said.
But the economists were in agreement that the quality of loans have improved overall for the banks.
“Our book has mostly low loan-to-value ratios. Even if the value of housing moves [downwards], people will still be expected to service their loans. I don’t think we will have situation where people will be forced to sell their house if they can’t meet their mortgage repayments," Westpac’s Evans said.
Similarly, CBA’s Blythe acknowledged that there is a low LVR on the books of Australia’s biggest lender.
“Around 76 per cent of our customers are ahead of their repayments. Our borrowers have tended to increase their repayments given the low interest rate environment. We have also seen a huge influx of mortgage offset accounts. On average our customers are now three months ahead with their mortgage repayments,” he said.
However, while the housing fundamentals are strong, RBC’s Ong believes there could be some risks ahead.
"The labour market is in good shape and unemployment has drifted lower, population growth remains strong – the key drives to a strong housing market are intact. But the strength of the market is really about supply and demand and we remain concerned about the possibility of an oversupply in the construction of apartments. This trend does signal additional risks for the outlook,” Ong said.
The panel also acknowledged the implications of geopolitical risks such as Brexit and the 2016 US elections on global economies including the possibility of a fiscally irresponsible leader in Australian government.
S&P’s Bovino spoke about a trade war spurred on by the US and its negative impacts for the rest of the world.
“The US is full steam ahead in terms of our economy – rising employment, increasing business and consumer confidence and an expected 3 per cent growth – but we have created a few problems for everyone else, sorry,” she said.
Depending on whether it is branded a “trade war or a “trade nuisance,” Bovino added that China will feel the pain – further heighted by its policy on deleveraging – as well as Japan who exports to both the US and Chinese markets. The European Union on the other hand “has its own set of problems”.
While CBA’s Blythe said that the Australian economy will still “chug along” despite who is in government, for Auld, it will be the first time voters will have a stark choice between a Labor and a conservative government.
“What is clear is that a conservative government will cut migration flows. That will have implications for our economic growth,” Auld said.
“Our population growth has accounted for a higher GDP growth. It may not impact us day-to-day, but it does matter in the medium term.”