The Australian Prudential Regulatory Authority (APRA) has released a paper warning banks about not letting their lending standards slip. From The Australian:
THE banking regulator has moved to head off the build-up of systemic risk as record low interest rates and hot competition fuel property prices, and has warned banks not to relax home lending standards.
…the Australian Prudential Regulation Authority said it was critical that banks ensured customers could repay when rates “inevitably” increased.
The regulator said it would contact several lenders after yesterday releasing a major review of loan approval standards, which revealed shortcomings, including incomplete mortgage documentation…
“A sustained low interest-rate environment poses further risks to lending standards. It is important for ADIs to ensure that new borrowers are able to service debt and afford higher repayments when interest rates rise from current record low levels.
“Recent international experience indicates that a prolonged period of low interest rates can lead to rising household leverage and housing market pressures, with potential flow-on impacts on the credit quality of housing loan portfolios”…
The heightened competition as funding markets improve is driving the big banks to write more interest-only home loans and a large number with high loan-to-value ratios, data from APRA revealed last month.
CLSA analyst Brian Johnson said the banks had been increasing discounts and upfront commission payments to mortgage brokers. The surge in house prices — which had risen by an average of 5 per cent annually in capital cities — had coincided with the RBA’s rate cuts this year, he said.
“It’s also noteworthy that a large proportion of the lending would appear to be investors on interest-only terms,” he said…
Mr Johnson questioned whether rising house prices presented “systemic risk” for APRA and the RBA, noting house prices appeared more stretched than in New Zealand, which has curbed the banks’ high LVR lending.
Indeed, as we know, investors are at record proportions of lending and data released late last month by APRA suggests that there is a reasonable amount of higher risk lending going, namely:
- 38.7% of new home loans issued by banks over the June quarter were interest-only;
- 13.5% of new home loans had a loan-to-value ratio (LVR) of greater than or equal to 90%;
- 19.2% of new home loans had a LVR of between 80% and 90%;
- meaning that 32.7% of total new home loans issued over the June quarter were above 80% LVR.
It is also worth noting that, according to the Reserve Bank of New Zealand (RBNZ), 30% of new housing lending in New Zealand was at an LVR of above 80%, causing enough concern for the RBNZ to implement caps on higher LVR mortgage lending. Why APRA and the RBA are not following the RBNZ’s lead, and acting to implement similar measures in Australia instead of resorting to “jawboning”, remains a mystery.
