‘No signs of distress yet visible in housing market’

In terms of housing finance, Ms Owens noted that prior to the onset of COVID-19, lending conditions were becoming more accommodative for potential buyers.

This was enabled through the repeal of temporary macro-prudential measures; the halving of the cash rate between June and October 2019; and, declines in the typical mortgage serviceability assessment rate from 7.3 per cent in March 2019, to 6.3 per cent at December 2019.

“Cash rate declines are also reflected in the indicator lending rates to March. However, monetary policy and financial regulation [have] sharply shifted in response to COVID-19,” Ms Owen said.

“Policies now focus around deferring the implementation of a more conservative lending environment, ensuring high levels of liquidity among lenders, and ensuring low-cost debt to encourage spending.”

RBA measures

One of the major policies, of course, is the RBA measures to keep the cash rate target at record low levels “until underlying inflation reached the 2-3 per cent target band”. As Ms Owen noted, the RBA does not foresee that happening for at least two years.

“Similarly, the cash rate target would not be increased until ‘full employment’ is reached (which has been defined as an unemployment rate of 4.5 per cent). Governor [Philip] Lowe indicated the unemployment rate could remain above 6 per cent for the next couple of years,” Ms Owen said.

“Now that the cash rate is at the effective lower bound, the RBA has adopted ‘unconventional monetary policy’ to further encourage borrowing. This includes a three-year government bond yield target of 0.25 per cent through bond purchases in the secondary market. This puts money back in the hands of investors, while also lowering the cost of debt for the government.

“The RBA has also introduced a three-year funding facility for banks of up to $90 billion with a concessional interest rate of 0.25 per cent. Further funding will be extended specifically for lending to businesses. For every $1 lent to large business, funding will be extended by $1. For every $1 lent to small- to medium-sized businesses, funding will be extended by $5.

“It is noteworthy that there are no extensions of funding for home lending. This echoes the structure of the broader stimulus package from the federal government, which skews support towards small- to medium-sized businesses.”

APRA measures

Elsewhere, APRA is adopting measures to compliment easier lending conditions amid COVID-19.

“According to the Australian Prudential Regulation Authority, banks were already in a strong capital position before the onset of COVID-19. The indicator APRA uses to illustrate this is the CET1 ratio, which refers to the required portion of capital banks must hold against the risk component of assets,” Ms Owen explained.

“The four major banks have a capital requirement of 10.5 per cent, but in a recent statement, APRA highlights the capital held by the entire banking system equates to 11.3 per cent.

“In the same note, APRA acknowledged that in the current environment, it would be acceptable for these capital ratios to sink below the additional, high-capital requirements set in 2017, provided banks can still meet minimum capital requirements. This will give banks more room to lend in the coming months.”

Other accommodations made by APRA, highlighted by Ms Owen, include:

• New reporting methods for loans where repayment pauses have been offered for six months;
• Postponed implementation of supervisory and policy initiatives to 2021;
• Postponed implementation of Basel III reforms until 2023; and,
• Suspended issuing of new banking licenses for six months.

Going forward

In conclusion, Ms Owen noted each of the aforementioned policies is “highly important” for allowing banks to offer reprieve to loan customers, including mortgage holders.

“The current crisis could exacerbate one of the biggest downside risks to the Australian economy: high mortgage debt,” she explained.

“Housing debt was 142.1 per cent of disposable household income at December 2019, which is a return to record highs after a small dip in the September quarter.

“If reductions in income mean this debt cannot be serviced, there may be increased incidences of distressed sales, which would bring broader housing market values down further.

“It is worth noting that no such signs of distress are yet visible in the housing market. This is supported by a very low level of for sale listings.

“However, it is vital that if the COVID-19 lockdown extends beyond the allotted six months of mortgage reprieve, that banks may implement additional hardship measures aimed at reducing loan payments or extend deferrals on mortgage repayments further. Otherwise, the period after six-month loan deferrals will be a true test for the stability of the housing market.”

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