Macroprudential Limits on Mortgage Products: The Australian Experience

Discussion Paper: This paper shows that APRA’s 2014 and 2017 macroprudential credit limits quickly reduced housing credit growth in the targeted mortgage products. The overarching objective of the policies was to strengthen financial stability given the pre-existing economic environment.

• The Australian Prudential Regulation Authority implemented 2 credit limits between 2014 and 2018. Unlike similar policies in other countries, these imposed limits on particular mortgage products – first investor mortgages, then interest-only (IO) mortgages.
• With prudential bank-level panel data, we empirically identify banks’ credit supply and interest rate responses and test for other effects of these policies. The policies quickly reduced growth in the targeted type of credit while total mortgage growth remained steady.
• Banks met the limits by raising interest rates on targeted mortgage products and this lifted their income temporarily. The largest banks substituted into non-targeted mortgage products while smaller banks did not.
• Practical implementation difficulties slowed effects of the (first) investor policy, and led to some disproportionate bank responses, but had largely been overcome by the time the (second) IO policy was implemented.

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