The Council of Financial Regulators is out with its quarterly update:
The Council continues to closely monitor the resilience of Australian households to higher interest rates and cost-of-living pressures. Most households are well placed to manage the impact on budgets due to strong labour market conditions and sizeable saving buffers. This includes fixed-rate borrowers, who have, to date, generally managed the transition to higher interest rates at the end of their fixed term. However, some households are experiencing significant pressure on their finances, including those on lower incomes (including many renters) and those with low savings buffers and high levels of debt relative to their income. As economic conditions have become more challenging, the share of housing and business loans in arrears has increased a little, albeit from very low levels. The Council will continue to closely monitor lenders’ approaches to supporting customers experiencing financial hardship or other changes in financial circumstances.
External refinancing activity for home loans had remained at very high levels, reflecting strong competition among lenders. The Council recognised that some borrowers were facing challenges in refinancing their existing loan with another lender because of a range of difficulties, including in meeting the serviceability criteria that lenders use. APRA’s prudential framework does not prohibit banks from lending to these borrowers, although APRA expects that banks will set prudent limits for their exceptions to lending policy and monitor such lending closely. Council members supported APRA’s assessment that the serviceability buffer – currently set at 3 per cent – remains at the appropriate level given the current environment, including the high degree of uncertainty and risks to the economic outlook. The Council noted that APRA would continue to assess the appropriateness of macroprudential policy settings as economic and financial conditions evolve.
I am increasingly torn on this.
In macro terms, it makes sense to keep the buffer intact. It aids the RBA in its tightening campaign.
But, in financial stability and equity terms, there is an argument for loosening the buffer for existing mortgages.
There are increasing reports of “mortgage prisoners” who cannot refinance owing to the buffer. Allowing these mortgages to refinance will prevent defaults and increase financial stability.
It will also increase competition owing to fewer trapped mortgages.
We also have to ask is it fair for the COVID generation of mortgagees to carry such a disproportionate load in addressing pandemic stimulus fallout? Lives will be wrecked.
Nor will loosening the buffer have much, if any, impact on house prices. Although there will be fewer forced sales, the overwhelming driver is new mortgages still subject to the buffer.
Given the marginal state of these existing borrowers, if the buffer were reduced enough to enable more refinancing, any uplift in economic activity is likely to be very limited and unlikely to be material for the RBA.
