The outgoing boss of Australia's banking regulator has denied responsibility for the latest housing boom and bust, while adding that the price falls may be good for the nation.
In his final public appearance as Australian Prudential Regulation Authority (APRA) chair, Wayne Byres repeated that the regulator did not have a mandate to control housing prices.
"APRA's interest in housing stems from our job to protect bank depositors — who provide the funds that banks lend for housing — and from seeking to promote overall financial system stability," he said in a lunchtime speech hosted by FINSIA.
"We do that through ensuring bank balance sheets are sound and lending standards are appropriate."
"Incidentally, that benefits borrowers (by limiting their capacity to overextend themselves) and impacts housing prices (through influencing the demand curve for housing) but both of those are indirect consequences of our core tasks: they are not our goals."
Mortgage 'repayment shock'
However, question marks remain over whether APRA has adequately limited borrowers' capacity to overextend, given that in July 2019 it removed a 7 per cent floor on the interest rate to be used to assess how much someone could borrow.
Instead, borrowers could be assessed on whether they could afford repayments if interest rates 2.5 percentage points above their initial mortgage rate.
In an exclusive on-camera interview with the ABC, Mr Byres defended that move saying it was "an on-balance judgement" and he had "no regrets" about his actions while in charge of APRA.
"We're comfortable with the setting where it is."
After remaining at 2.5 percentage points for more than two years, APRA lifted the serviceability buffer to 3 percentage points late last year.
When asked if this was too little too late, after mortgage debt surged and house prices soared by almost 30 per cent nationwide from mid-2020 to early 2022, Mr Byres said he was not too concerned.
"There'll inevitably be some pockets of stress in the housing loan portfolios in the banks," he responded.
"But it only is really a challenge if not only have banks exhausted that 3 per cent buffer, but also borrowers have borrowed at their absolute maximum capacity.
"And lots of borrowers don't borrow at their absolute maximum capacity."
The Reserve Bank board noted in its minutes on Tuesday that many recent borrowers have now reached that threshold after the RBA raised the cash rate 2.5 percentage points in six months.
That means that, for every interest rate rise from now on, there will be some mortgage borrowers who are required to make higher repayments than they were tested for when they took out the loan.
Mr Byres acknowledged that some of these borrowers would not find 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," he observed.
"Borrowers currently on very low fixed rates face a significant repayment shock in the future."
When asked during the interview how many borrowers might fall into these groups, Mr Byres responded: "I don't know what the number will be."
The outgoing regulator said APRA had taken some measures to limit the level of riskier lending in the housing market.
"Behind the scenes, against a backdrop of increasing risk, we have been persistently reinforcing lending standards across the board," he argued.
"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."
Struggling borrowers 'not a sign of weak lending standards'
However, Mr Byres reiterated that it was not APRA's job to protect borrowers from taking out loans that were likely to push them into financial difficulty.
"The existence of some borrowers in difficulty is not a sign of weak lending standards," he argued.
"After all, a bank that does not make a bad loan will be a bank that denies credit to many good customers."
Rather, APRA is solely focused on the health of individual banks and the broader financial system.
"Prudential regulation is designed to ensure that downturns can be weathered," Mr Byres continued.
"In Australia, the banking system is 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."
Indeed, Mr Byres said there could be long-term benefits stemming from the current housing downturn, despite individual pain for many recent homebuyers.
"The only way to genuinely improve affordability over time is to keep the rate of increase in housing prices below that of our incomes," he said.
"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."
Word of caution for the banks
Despite seeming generally relaxed about the current housing decline amid rising interest rates, Mr Byres did acknowledge it was a time for caution.
"It's a pretty sobering outlook internationally, globally there's a degree of pessimism around," he told ABC News.
"That's an environment in which everyone needs to be cautious. In Australia, what does that mean for us? It means we also need to be cautious and prepared, but I think we've got the foundations for working our way through that.
"We've got a strong financial system, low unemployment, we've still got economic growth.
So we should be certainly very alert, we should be watchful, but still have a degree of confidence about our ability to get through it."
However, Mr Byres did express concern about some banks winding down their provisions to cover bad debts in order to hand more cash back to their shareholders.
"It's important that provisions are maintained with a forward-looking perspective," he told ABC News.
"So, not think that because today there isn't any high level of stress, that there wouldn't be or couldn't be tomorrow."
