Michael Pascoe: APRA is helping the rich borrowers again

Fresh from making it harder for less-privileged first-home buyers to borrow enough to compete in the market, our banking regulator has formalised better rates for rich mates – ensuring borrowers with very fat deposits can borrow more cheaply than those with a mere 20 per cent deposit.

APRA also declared war on interest-only loans – again.

It did so back in 2017 when the housing market was roaring, then retreated in 2018 when it was not. Now it’s blasting IO loans with less than a 20 per cent deposit and contracted for more than five years.

APRA says the new rules are all about the safety of our deposit-taking institutions – our banks, credit unions and building societies – but there’s also some unstated social engineering at work.

You can get a taste of that with the way the changes have been reported.

“Home loan interest rates to keep favouring owner-occupiers over investors” headlines the ABC.

“Banks to hold more capital for interest-only loans” reports the AFR.

“APRA rules to target higher risk loans” says the SMH – but does it?

The APRA documents are big on suppositions about risk, but short on proof.

For example, housing loans for investors are treated as riskier for lenders than loans to owner-occupiers and therefore banks are required to hold more capital to back investor loans, making them more expensive for the banks which therefore charge higher interest rates.

But the reality of investors v owner-occupiers is different, or at least was before COVID made all figures abnormal. Take Exhibit A from property analyst Pete Wargent:

Last decade, investor loans were consistently less likely to be in arrears.

IO loans are considered riskier for the lenders because the borrowers don’t reduce their principle, meaning they are more exposed if housing prices fall – as they sometimes do.

That was explained by Reserve Bank deputy governor Guy Debelle in a 2019 speech using the example of Australia’s last major housing crash – Western Australia in the four years up to 2020.

“(IO loans) are more risky for the lender as they can lead to larger losses,” Dr Debelle said.

“Since IO borrowers are not required to make principal payments, their outstanding loan balance need not decline over time. Because of this, IO loans increase the chance the loan ends up in negative equity if housing prices fall, and so expose the lender to a loss if the borrower cannot make their repayments.”

But he also said:

“We also found that the increase in arrears for IO and principal and interest (P&I) loans have been similar.”

APRA doesn’t care. IO loans of more than five years and with a loan-to-valuation ratio of more than 80 per cent are being priced out of the market, being treated as unsecured loans.

Poor old IO gets unfairly picked on when it has a legitimate and sometimes valuable role.

As I argued early in the pandemic, it would have been far better policy to scrap the penalty premium on IO than offer people repayment moratoriums.

Similarly, if a couple’s income falls during paternity leave, it can make good sense to switch to IO for a while and there can be no justification for imposing a penalty.

The APRA rules fall into the usual big picture economic supposition of “all things being equal” when they rarely are.

Yes, the bigger the deposit, the greater the equity, the richer the customer, the less risky it is to lend them money. In the really bad old days, it sometimes seemed banks wouldn’t lend you money unless you didn’t need to borrow.

But fiddling in the name of “risk” when it’s at least partly about Australia’s lack of anything like a housing policy is simply misleading.



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