With the federal treasurer confirming that macroprudential curbs to mortgage lending are on the cards, it appears to no longer be a matter of if, just when, policy will be introduced.

The Council of Financial Regulators on Wednesday noted they have been in discussions about possible macroprudential policy responses. They also noted that over the next couple of months, the Australian Prudential Regulation Authority also plans to publish an information paper on its framework for implementing macroprudential policy. 

The last time lending restrictions were implemented, the focus was on dampening the heightened investment in the property market and excessive use of interest-only mortgages.

However, the main culprit for the looming round of lending restrictions appears to be the increasing share of loans on a debt-to-income (DTI) ratio. Almost a quarter (22%) of new mortgages in Australia now have debt that outweighs their income by more than six times, up from 16% a year ago. 

The introduction of macroprudential policies, particularly those around debt to income, will have limited impact on higher wealth households, particularly those with multiple income streams. It will, however, most adversely affect lower-income households and those purchasing property for the first time.   

There are several reasons the DTI ratio has risen over the past year. 

First, low interest rates by their very nature allow people to service more debt as repayments fall. Lower interest rates have been a key driver of property price growth over the past two years and the number of high-debt borrowers has naturally increased as more people can afford larger mortgages.  

Second, the share of lending to first-home buyers has increased significantly on the back of HomeBuilder, the federal government’s First Home Loan Deposit Scheme, and individual state government incentives.  

First-home buyers tend to be more indebted as they stretch to get into the market. Given improving home ownership rates is the goal of these government schemes, it seems counterproductive to limit first-home buyers by reducing their ability to borrow. 

Increased work-from-home flexibility has also contributed to the growing DTI ratio as many have reassessed their housing circumstances in a bid for more space. Seeking out larger homes with offices or big yards to enjoy as they spend more time at home, many people have reallocated more of their budget towards upsizing. 

In our two largest capital cities, both of which are enduring prolonged lockdowns, most offices are closed and so too are the retail and cultural amenities we typically spend money on. This means fewer coffees, fewer meals out, fewer public transport rides and less spent on tolls and parking, which adds up to more savings that can be put towards housing.  

In areas not in lockdown, data shows that people are continuing to spend less time in the office and more time working from home, so they too are cutting back on discretionary expenses. 

Although people may be taking out mortgages on marginally higher DTI ratios than those in the past, this is a function of the lowest mortgage rates on record leading to the ratio of housing interest repayments to household income sitting at its lowest share since 1999. 

None of this is to say that we shouldn’t be concerned about the rapid appreciation in property prices, but caps on DTI will have a considerable impact on the property market. The rapid rise in property prices in not unique to Australia – property prices are now rising across most advanced economies globally.

Focusing on more subtle ways to cool the market, such as lifting mortgage serviceability assessment floors, will give regulators the opportunity to ride out the remainder of the COVID-19 restrictions so they can reassess what the housing market looks like in our new normal.