Clamps mortgage lending imposed on the banks to cool the housing market in recent years could be loosened as an alternative to cutting interest rates leading market analysts have predicted as policy makers now seek to address falling property prices.
As markets bet there is a 50-50 chance the next move in official interest rates will be a cut, in part because of falling house prices, some experts say there is also room for the Australian Prudential Regulation Authority (APRA) to take action to ease "macroprudential" policy.
APRA has played a critical role in putting the brakes on the $1.6 trillion home loan market in recent years. It has capped lending to property investors and customers with interest-only loans, and forced banks to more thoroughly vet prospective customers, and how they would cope if interest rates were to rise.
As 2018 came to a close, however, the Council of Financial Regulators, which includes APRA and the RBA, raised concerns banks were being "overly cautious" in their lending decisions.
APRA also last month said it would scrap a limit on interest-only loans from the start of this month, after also axing a cap on loans to investors earlier in 2018.
In a note to clients, Macquarie economists Justin Fabo and Ric Deverell said there was a "non-trivial chance" of APRA further loosening curbs on the mortgage market.
A "meaningful" change APRA could make would be to lower the 7 per cent minimum interest rate at which banks are required to test all new customers, which is about 3 percentage points higher than interest rates banks actually charge.
"This APRA directive probably made a lot of sense 2-3 years ago when banks’ serviceability assessments
in other areas (e.g. on expenses) were lacking," the Macquarie analysts said.
However, they said APRA could "sensibly justify" that a 7 per cent minimum interest rate was now too high, because banks had tightened up their assessments of mortgage customers in other ways, adding that a 3 percentage point hike in interest rates appeared "extremely remote."
The economists said the hurdle for APRA lowering this interest rate floor would be "high" and they therefore did not expect such a change "anytime soon".
If the banks were turning off the credit tap, you would not be seeing that discrepancy.Deutsche Bank's Phil O'Donaghoe
Macquarie on Monday also became the latest bank to pare back expectations of a rise in interest rates, predicting instead that the RBA would remain on hold "at least" through 2020.
Deutsche Bank economist Phil O'Donaghoe also said there was chance APRA would loosen credit restrictions, "if house prices start falling through the floor and we start seeing credit clamming up."
However, Mr O'Donaghoe said he thought the next move in interest rates would be an interest rate rise later this year, despite markets pricing in the chance of a cut over the last month.
While some economists have predicted falling house prices and tighter bank lending will force an RBA rate cut, Mr O'Donaghoe said the housing weakness was mainly confined to Sydney and Melbourne, with prices rising in some other capital cities.
"If the banks were turning off the credit tap, you would not be seeing that discrepancy," Mr O'Donaghoe said.