Those fortunate to be able to afford a home loan will now have to prove they can pay 3% above the interest rate the bank is offering. It is a new measure introduced ironically not to ensure people will be able to pay when rates increase, but because rates are not about to increase at all.

What happens when you have the cash rate at 0.1%, and the average mortgage rate of 3.03% is well below anything seen in the past 60 years?

As we all know, house prices surge.

This surge means we are about to break the record for the level of housing debt to income:

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That is not something that is sustainable given our weak economy, but if you are the Reserve Bank you don’t want to raise interest rates to stop prices rising, because that will increase business loan rates as well and that would hurt the same weak economy.

How do we know the economy is weak? Well, for a start the cash rate is at 0.1% and the government just delivered a $134bn deficit and is set to deliver another one around $100bn this year.

That only happens when things are not going well. Despite all that massive stimulus, wages are still barely growing at 2% and the RBA doesn’t expect inflation to be above 2.5% until at least 2023.

And yet house prices are exploding.

So what to do?

The answer is macroprudential tools.

These are measures where the central banks and regulators attempt to tighten monetary policy without raising interest rates.

Often they are introduced because of worries about financial system instability.

For example, the first macroprudential tool introduced in Australia was the Australian Prudential Regulation Authority (Apra) telling banks in 2014 that annual investor credit growth going above 10% would be treated as an “important risk indicator” (ie don’t let it happen).

But at the moment credit growth is nowhere near 10%:

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The concern now is house prices. They are soaring and yet the RBA cannot raise rates for fear of giving the rest of the economy a whack.

So instead what Apra has done is announce that banks need to ensure that borrowers are able to afford a home loan should interest rates rise by 3% points rather than the previous “buffer” of 2.5%.

In effect this is raising interest rates without doing so.

Right now the average mortgage rate being paid by owner-occupiers is 3.03% (and if you are paying more than that ring your bank and demand a rate cut):

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If you live in New South Wales, that means for a 25-year loan on the average mortgage of $750,784, your monthly repayments are $3,573.

In the past though the banks would have checked that you had the ability to pay $4,624 a month – for that is the repayment at 5.53% (3.03 + 2.5). Now the banks will check if you can pay $4,852 – the repayments for a loan at 6.06%:

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But there is actually very little chance you would ever have to pay that amount.

For rates to rise 3% points we would need to have a massive economic boom. Consider that during the early 2000s mining boom it took six years for average mortgage rates to rise from 6.07% to 9.34%.

We are not about to have such a boom any time soon.

So the RBA and Apra are not worried that people are soon going to be unable to repay their loan.

But this also means the RBA (and homebuyers) know rates won’t rise for a long time, and probably not by much even then. And that situation is ripe for booming house prices.

So what these measures do is efficiently reduce the number of people who are able to be approved for a loan. Because, as we know, the lower the growth of home loans, the lower the growth of house prices.

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And so if, for example, you live in Victoria, you will be asked if you can afford an extra $1,060 a month for a 25-year loan, rather than $872, as was the case with a 2.5% buffer:

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Given it is just an extra $188 a month, it’s clear that the RBA and Apra don’t want to cause a massive halt to borrowing – but just to temper it.

But these higher buffers also suggest the RBA is not about to raise rates – because you only pursue macroprudential tools when the other tool of increased interest rates needs to remain on the shelf.