APRA, Australia’s banking regulator, has announced further measures to control building financial risks in the Australian property market, confirming months of speculation that an intervention was imminent.
“Since December 2014, APRA, together with Council of Financial Regulator members, has closely monitored residential mortgage lending trends and the resulting impacts on the resilience of lenders, as well as the household sector more broadly,” it wrote in a statement released on Friday.
“This increased scrutiny has been in response to an environment of heightened risks, reflected in an environment of high housing prices, high and rising household indebtedness, subdued household income growth, historically low interest rates, and strong competitive pressures.
“Given this environment, APRA has concluded that further steps to address risks that continue to build within the mortgage lending market are appropriate,” it said.
Here are the new measures introduced on top of the 10% annual cap on investor credit growth that was first established in December 2014.
- Limit the flow of new interest-only lending to 30% of total new residential mortgage lending, and within that place strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80% and ensure there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90%
- Manage lending to investors in such a manner so as to comfortably remain below the previously advised benchmark of 10%
- Review and ensure that serviceability metrics, including interest rate and net income buffers, are set at appropriate levels for current conditions
- Continue to restrain lending growth in higher risk segments of the portfolio (e.g. high loan-to-income loans, high LVR loans, and loans for very long terms).
No reduction in the 10% annual cap on investor credit growth was announced, with APRA chairman Wayne Byres noting that it “continues to provide an appropriate constraint in the current environment, balancing the need to continue to moderate new investor lending with the increasing supply of newly completed construction which must be absorbed in the year ahead”.
“APRA expects ADIs to target a level of investor lending growth that allows them to comfortably manage normal monthly volatility in lending flows without exceeding this benchmark level,” he said.
Many had expected APRA to reduce the annual cap on investor credit growth further given the success the regulator enjoyed when the measures were first introduced in late 2014.
However, with interest-only loans — used by the vast majority of housing investors — now capped at 30% of total new residential mortgage lending, it suggests that total credit growth to this component will likely cool as a consequence.
“Additional supervisory measures, particularly in relation to the high level of interest-only lending, are warranted,” Byres said. “Our objective with these new measures is to ensure lenders are recognising the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions.”
Total interest-only lending as a percentage of total new mortgage lending currently stands at around 40%, a level that Byres said is quite high by international and historical standards.
“APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile,” he said.
“We will therefore be monitoring the share of interest-only lending within total new mortgage lending for each ADI, and will consider the need to impose additional requirements on an ADI when the proportion of new lending on interest-only terms exceeds 30% of total new mortgage lending.”
Although it refrained from introducing tougher loan serviceability standards on this occasion, the regulator warned that tighter scrutiny on borrowers may follow in the future.
“APRA considers it important that borrowers retain some level of financial buffer to allow for unexpected events, especially for borrowers that have high levels of indebtedness,” said Byres.
“APRA will therefore continue to scrutinize serviceability assessments, and ADIs continue to need to advise APRA should they propose to change their existing methodologies or policies.”
While the tighter lending standards only apply to Australian authorised deposit-taking institutions (ADIs), APRA said that it was also monitoring growth in warehouse facilities provided by ADIs to other lenders, including non-bank lenders.
“APRA would be concerned if these warehouse facilities were growing at a materially faster rate than an ADI’s own housing loan portfolio, or if lending standards for loans held within warehouses are of a materially lower quality than would be consistent with industry-wide sound practices,” it said.
Warehouse loans are used to finance mortgages written by smaller lenders until they are packaged into mortgage backed securities (MBS) and sold to institutional investors.
The move from APRA follows continued strength in the Sydney and Melbourne property markets, something that has corresponded with a noticeable acceleration in investor activity over the same period.
According to data released by the ABS earlier this month, lending for housing investment soared by 4.2% to $13.784 billion in January, the largest monthly total since May 2015.
The figure was 27.5% higher than the levels of a year earlier, and was the strongest growth since January 2015, the month after APRA introduced its 10% annual cap on investor borrowing.
Separate data released by the RBA said that housing investor credit increased by 6.6% in the year to January, below APRA’s annual 10% cap but a significant acceleration on the levels reported in mid-2016.