RBA, APRA sing different tune on serviceability buffers

“I have trouble seeing inflation to 2-3 per cent for quite some time. It’s going to be a long drawn-out process until we get full employment, which means we’re going to keep interest rates where they are, perhaps for years,” he said.

In light of his concession, Mr Lowe was asked to assess the suitability of the Australian Prudential Regulation Authority’s (APRA) 2.5 per cent buffer rate for mortgage serviceability assessments.

In response, Mr Lowe said he did not expect movements in the cash rate to narrow the gap between current interest rates and the buffer rate set by APRA.  

“I think that’s very, very unlikely,” he said.

“Something extraordinary would have to happen for interest rates to go up 10 times in the next couple of years.”

The RBA governor added that given the low interest rate environment and economic turbulence from the COVID-19 crisis, it would be “reasonable” to consider an adjustment to APRA’s buffer rate.

“APRA did last year make some adjustments to the way the buffer was calculated. It used to be a fixed level and then it became a margin over the cash rate, which I think is sensible,” he said.

“I think it’s a reasonable discussion to have about whether that buffer could be narrowed given the extraordinary circumstances that we’re in at the moment.”

However, in his appearance before the committee, APRA chair Wayne Byres dismissed the need for the change, stating that the provision also guards against non-interest-based serviceability risks.

“The thing about that buffer is that [if] you regard that as simply covering interest rate risk, it’s a large buffer,” he said.

“But within bank’s serviceability calculations, it provides a proxy for all sorts of uncertainty – it provides a proxy for uncertainty about reductions in income, unemployment, illness, divorce, all of those things that happen when banks are granting loans for 25-30 years.”

Mr Byres warned that changes to the buffer rate would need to be “compensated” with alternative measures to mitigate growing credit quality risks.

“The way we look at it is standards across the system are OK at present. It’s a highly competitive market for housing credit. There are hundreds of businesses jostling to provide housing finance,” he said.

“Housing debt in the household sector is already very high, so access to credit and access to significant amount of credit hasn’t been a constraint.”

“We are in this environment at present, where [property] prices could well soften, debt is very high, and income growth is likely to be subdued, if not, for many households, falling.”

He added: “My point would be we need to be very careful about any change, and if you change that buffer purely on the basis of interest rates, you’d have to make some compensating changes elsewhere to keep standards at a sensible level.”

The APRA chair also claimed that lenders could incur unnecessary costs associated with alternative serviceability requirements imposed in response to a cut to the buffer rate.

“My starting proposition will be there would be a lot of costs and admin associated with changing that, which you wouldn’t want to put the system through at this point.”

When asked why a lower buffer rate would not be sufficient on its own, Mr Byres said such a scenario “could be examined”, but stressed that an easing of credit standards would risk upsetting the current balance in the midst of an economic crisis.  

“I think we’d be very careful in this environment of saying we should be loosening credit standards, at a time when significant household debt already exists, income growth is subdued and, for many households, income uncertainty has decreased, and we’d want to maintain a degree of caution,” he said.

“My observation would be it is not the case that access to credit is a particular problem at present, access to housing credit.” 

The APRA chair concluded: “The interest rate buffer only serves to, in a sense, limit the maximum amount a customer can borrow. Many customers don’t go to their maximum amount, so it’s not necessarily a constraint in lots of cases, but it’s a useful controlled system [in] the environment we’re in.”

[Related: APRA relaxes mortgage serviceability guidance]