RDP 2021-07: Macroprudential Limits on Mortgage Products: The Australian Experience 8. Conclusions

This paper shows that APRA's 2014 and 2017 macroprudential credit limits quickly reduced housing credit growth in the targeted mortgage products. To conclude, we reiterate how the paper's empirical findings align with the 3 key results outlined in the Introduction.

1. Banks met the credit growth limits by raising interest rates, enabled by the policies. The policies caused banks to raise rates on targeted mortgage types (Sections 5 and 6). This was to some degree intended, because banks were viewed as underpricing the risk inherent in those loans (RBA 2018). The rise in mortgage rates has already been shown: the ACCC and PC examine this in their analysis of competition in the Australian mortgage market (ACCC 2018a, 2018b; PC 2018). Our results add statistical evidence of a policy effect to their conclusions, quantify the rate reactions for different banks, and show that, for the investor policy, banks' credit quantity reactions were also driven by factors other than interest rate changes (Section 5.2).

ACCC (2018a, 2018b) conclude that some of the rate rises reflected a policy-induced softening of price competition. Our results indicate that this was in part true for the IO policy, because banks' mortgage interest income picked up above model-implied values temporarily during this period (Section 7.2.3). There were also rate rises on non-targeted mortgages after the investor policy, but banks indicated these were driven by funding costs (Section 5.2). The temporary softening of pricing competition, while a negative consequence in itself, was possibly a worthwhile cost, given that the policy appears to have achieved its financial stability objectives.

2. Banks' reactions to the limits depended on their size. Large banks substituted into non-targeted mortgage types by, at least in part, reducing rates on those mortgages (Sections 5.2 and 6.2), while mid-sized banks lowered rates on non-targeted mortgages but experienced no substitution. In turn, large banks' average mortgage growth did not significantly change, while midsized banks' average mortgage growth significantly declined (Sections 5.1 and 6.1). However, the positive effect on large banks' share, among the sample banks, was only small and short-lived, seemingly at the expense of their interest income (Section 7.2.2). It is not entirely clear why large banks substituted and mid-sized banks did not, but it is plausible that large banks' operational systems were more flexible. Future work could explore this.

3. Practical implementation difficulties complicated the policy effects. The reactions to the investor policy do not neatly align with a theoretical representation of banks choosing new credit growth targets and shifting to them. Practical difficulties complicated the outcomes. The reaction to the investor policy had a 2-quarter delay (Section 5.1), some mid-sized banks had difficulty controlling their investor credit flows (Section 5.2) and several banks that were not exceeding the investor limit contracted lending seemingly unnecessarily (Section 5.3). The delay was partly caused by these control difficulties, but, as contacts tell us, partly also due to uncertainty about how strictly and quickly the limit would be applied, and around how the limit was defined (Section 5). For example, many investor mortgagees reacted to the rate rises by telling their bank they were actually occupiers (Section 7.3), which complicated credit growth calculations.

In contrast, banks' reactions to the IO policy were immediate and more closely related to whether they exceeded the limit (Section 6). It appears that banks improved their systems while reacting to the investor policy, including by developing price differentiation capabilities. APRA was also intentionally more explicit in its expectations for the IO policy.

Final comments. The overarching objective of the policies was to strengthen financial stability given the pre-existing economic environment. The goal of this paper is to examine banks' reactions, rather than to explicitly gauge the policy success, but our results are consistent with the objective being achieved. Commitments growth in the targeted mortgage products – products that were judged to be contributing to systemic risk at the time – dropped markedly, after growing strongly prior to the policies. Banks now charge higher spreads on the mortgage products that were targeted, and APRA will soon reform capital risk weightings to account for the differential in systemic risk contributions across mortgage types.