By Annie Kane
19 October 2022
In his final official speech as APRA chair, Wayne Byres has outlined why lower housing prices and lower debt levels “would be no bad thing”.
As the chair of the prudential regulator, Wayne Byres, prepares to leave his role after eight years, he has reflected on the overall strength of the financial system and the themes that have dominated his tenure.
Speaking to the Financial Services Institute of Australasia (FINSIA) — a professional institute for practitioners in the financial industry — for its “Conversation with Wayne Byres” event on Wednesday (19 October), Mr Byres outlined why falling house prices were not necessarily a bad thing.
Among the reflections (which also touched on capital, superannuation, community expectations and housing loan risk weights within the capital framework), Mr Byres noted that a constant feature of his time as chair had been Australia’s “obsession” with housing.
Reiterating that APRA “does not have a mandate to control housing prices”, but instead works to “protect bank depositors, who provide the funds that banks lend for housing”, Mr Byres reflected on the work that APRA had taken to ensure lending standards were sound and that bank balance sheets were well shored up.
Over his chairmanship, Mr Byres noted that “ever lower interest rates drove the housing cycle upwards”, which had led APRA to work to “ensure competitive exuberance did not undermine basic credit standards”.
He flagged that “much attention” had been given to the benchmarks on investor lending and interest-only lending that APRA brought in over 2017 to “temper” lending to this segment of the market.
“Some of our interventions on housing were criticised because they dampened competition,” he told FINSIA delegates.
“They did, and deliberately so. We saw competitive pressures playing out in the form of lower credit standards. Preventing that erosion was important in an environment of rising risks: rising house prices, high household debt; subdued income growth and extremely low interest rates.
“These were conditions in which one might expect a prudent bank to be trimming its sails, not hoisting the spinnaker,” reiterating that interventions were generally imposed most heavily on the largest lenders.”
Since then, Mr Byres said APRA had been working to “persistently reinforc[e] lending standards across the board”.
This had been done, he outlined, by “improving income verification practices, insisting on more than an assumption of poverty line living costs, requiring better assessments of a borrowers’ ability to service not just their mortgage but their aggregate debt levels, and generally increasing the buffer for uncertainty”.
Financial stability not threatened by property downturn
Mr Byres acknowledged that Australia “now finds itself in an environment we all knew would eventually come: one of rising interest rates and falling house prices”.
“Both are occurring sooner, and at a faster rate, than most people anticipated a year ago,” he said.
“When things shift suddenly and unexpectedly, as they have, not everyone finds it easy to manage. Borrowers with only a small equity buffer and/or high levels of leverage relative to their income will be particularly challenged. Borrowers currently on very low fixed rates face a significant repayment shock in the future.”
However, he noted that the existence of some borrowers in difficulty was “not a sign of weak lending standards”.
“After all, a bank that does not make a bad loan will be a bank that denies credit to many good customers,” he said.
While he said that banks would need to “work with hardship cases sensibly”, the outgoing APRA chair said he believed the banking system was “in good shape to weather the adjustment, and — notwithstanding there will be pockets of stress within loan books — there is no sense it will threaten the soundness or stability of the system”.
Mr Byres explained: “The build-up of prudential strength has seen us navigate the past couple of years well and, with careful stewardship, will see the system resilient through the next few as well.”
Moreover, the head of the prudential regulator highlighted that falling house prices were not necessarily a negative thing.
“Australian housing prices are undeniably high, and a sustained lower level of prices would be no bad thing overall,” he said.
“Our decisions as a society to turn an ostensibly abundant resource — land — into something highly valuable, requires the community to take on very high levels of debt to house themselves. First home buyers need more than a decade of diligent saving to put together a deposit, creating a major barrier to entry into the housing market.
“As a nation, we fret about housing affordability. The only way to genuinely improve affordability over time is to keep the rate of increase in housing prices below that of our incomes.
“From a narrow financial stability perspective, lower housing prices facilitating lower debt levels would be no bad thing.
“From a broader societal perspective, I suspect there would be many more benefits from people having to use less of their income to simply put a roof over their head.”
‘I rarely find myself thinking that I would swap what we have for others’
In closing, Mr Byres reflected he had steered APRA through “some fascinating times” (indeed, his tenure has covered major financial disruptions such as the banking royal commission and the emergence of COVID-19 and record-low interest rates).
He went on to say that, when comparing Australia to other countries, he believed the country had a “good financial system” and that he believed APRA had delivered on its core mandate of delivering a “safe and stable financial system”, despite some “pretty interesting ups and downs”.
“Having had the chance to look around the world at circumstances elsewhere, I rarely find myself thinking that I would swap what we have for others,” he said, thanking his colleagues and government for their “tremendous support”.
Looking to the future, the APRA chair said his successor would likely continue to be busy focusing on the same key areas he had, as well as “newer issues” such as:
- Risk culture and incentives
- Digital finance and crypto assets
- Cyber security
- Climate risks