The current housing boom is a ‘direct result’ of cheap bank financing from the RBA



According to a non-bank lender executive, the RBA’s COVID backing to big banks fueled the latest real estate boom.

Last week, speaking to Australian Financial ReviewChris de Bruin, director of Westpac, said any stricter lending policy should apply to non-banks as well.

APRA on Wednesday increased the availability buffer for Authorized Depository Institutions, or ADIs, excluding non-banks.

However, the chief financial officer of nonbank lender Firstmac, James Austin, has suggested that cracking down on the nonbank sector right now would be misguided.

“Much of the current housing boom is a direct result of the term financing facility provided to ADIs,” Austin told Savings.com.au.

“It was cheap funding – only 0.10% – from RBA to ADIs for a three-year period. ADIs have used this money to come up with cash advance offers and cheap fixed rate offers.

“This cheap housing finance has caused housing prices to explode. Non-banks were not eligible for access to TFF, and therefore only ADIs are responsible for current market performance.

“It is therefore appropriate that non-banks have been excluded from the current regulatory action.”

In an explanatory note, APRA said it also does not consider that there is a basis to increase the rate of service for non-banks.

“APRA can only set rules for non-ADI lenders if these lenders are considered to materially contribute to the risks of instability in the Australian financial system,” the note said.

“APRA is closely monitoring trends in non-ADI lending, but… non-ADI lenders currently represent a fairly small share – less than 5% – of total home loans.”

A similar rule that non-bank lenders are subject to is ASIC’s responsible lending service cushion – currently set at 2.50% above the lending rate.

The big four banks took the lion’s share of TFF, all accessing 100% of their allocation: the CBA exploited $ 51.14 billion; NAB, $ 31.87 billion; Westpac, $ 29.78 billion; and ANZ, $ 20.09 billion.

The more than $ 200 billion program now accounts for around 25% of the Reserve Bank’s total balance sheet (as shown in the graph below).

RBAAssets1.jpg

However, in its assessment of the TFF, the RBA said the program also reduced funding costs for non-banks, as it resulted in lower funding rates in wholesale markets.

“The estimated cost of seeking three-year unsecured funding in domestic wholesale debt markets for major banks was around 0.6% at the end of June 2021, compared to 0.1% for funding from the TFF, ”RBA economists said.

The “spread” on residential mortgage-backed securities is also at its lowest level in more than a decade, according to the TFF assessment.

“Non-bank lenders have responded by issuing large volumes of RMBS, and their market share in home loans has rebounded from the modest decline around the middle of last year,” RBA economists said.

Contradiction of the regulator

Center for Independent Studies chief economist Peter Tulip said APRA’s policy was ill-conceived.

“If APRA is concerned about serviceability when rates rise, that should encourage borrowers to take out fixed rate loans,” Tulip told Savings.com.au.

“Reducing the cushion for this part of the fixed rate loans would be a good way to do it. But APRA shows no signs of having thought about it.

“I think the real reason they’re doing this is paternalistic: to protect borrowers from their own recklessness.

“People don’t agree on the merits of this, but what is not controversial is that it is a ‘second best’.”

Governments have also encouraged lending and the purchase of real estate by introducing stimulus measures such as Homebuilder, the First Home Loan Deposit Scheme and the Family Home Guarantee.

Write in the Australian Business Review last week, REA group economist Cameron Kusher pointed out the contradiction.

“The share of loans to first-time home buyers has increased dramatically thanks to HomeBuilder, the federal government’s First Home Loan Deposit Scheme and individual government incentives,” Kusher said.

“Since improving homeownership rates is the goal of these government programs, it seems counterproductive to limit first-time homebuyers by reducing their borrowing capacity.”

However, Mr Kusher recommended lifting mortgage service rates over the widespread debt-to-income ratio (DTI) crackdown.

Mr Tulip also said it was a favorable alternative.

“There is a paternalistic rationale for the interest cushion: APRA would argue that it is a wise practice,” he said.

“There isn’t even a paternalistic rationale for a DTI limit. As interest rates fall, higher DTIs make sense and work.”


Photo by Andy Wang on Unsplash

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