Macroprudential policy has played an important role in supporting home ownership in Australia in the past and remains a useful tool in housing policy, a report argues.
One of the themes in the Australian Housing and Urban Research Institute’s report on the effectiveness of policies to assist first home buyers is that fostering preferential treatment for first home buyers via financial regulation complements other forms of pro-first home buyer housing finance assistance.
The report, Assisting First Home Buyers: an International Policy Review, said such powers remain available to current regulators.
The main thrust of the report is that the type of demand-side assistance that has been the dominant approach in Australia for the past 40 years “primarily acts to bring forward first home purchases by households already close to doing so, rather than opening home ownership access to households otherwise excluded. In doing so, these measures add to demand and hence house prices.”
One consequence of this is Australia’s household debt to GDP is among the highest in the world.
Demand-side assistance includes grants, government-backed loans, low-tax savings schemes and stamp duty concessions.
Historically, demand-side assistance for first home buyers was complemented by supply-side policies, such as state-commissioned housing development for low-cost sale, as well as regulatory measures. However, in contrast to some comparator countries, this is no longer true.
The report identified some countries, including Singapore, Ireland and Finland, where financial regulations include provisions that seek to favour first home buyers.
The Monetary Authority of Singapore has imposed a loan-to-valuation limit of 75 per cent on borrowers who have a (non-Housing Development Board) housing loan, a 45 per cent limit for second loans and a 35 per cent limit for third loans. This limits the activity of investors, giving more opportunity to first home buyers.
In Ireland, the regulator-advised first home buyer loan-to-valuation ratio limit is 90 per cent, 80 per cent for other owner occupiers and 70 per cent for investors.
Finland’s LVR limit for first home buyer loans is 95 per cent, rather than the usual 90 per cent.
APRA’s macroprudential rules are designed to address risks to financial stability but the AHURI report said the regulations were not always limited in this way.
Until the 1980s, banks providing mortgages operated under widespread direct controls. These included interest rate ceilings, asset restrictions, quantitative lending guidance and controls that favoured new construction and first home buyers.
The scope for the exercise of APRA housing market influence was illustrated in 2014 and again in 2017, when the regulator’s intervention temporarily curbed bank lending to investor landlords to a substantial degree. Significant market cooling resulted while the controls remained in place.
This restraint was indirectly to the advantage of first home buyers, as competition in the marketplace was blunted.