Earlier this year APRA, Australia’s banking regulator, announced further measures to control building financial risks in the Australian property market, limiting the proportion of new interest-only lending to 30% of total new residential mortgage lending.
On a top of a 10% annual cap on investor credit growth that was first introduced in December 2014, it was another measure to curtail growing financial stability concerns as a result of increased investor activity in Australia’s housing market.
It looks like it has been starting to work.
According to data released by APRA today, total interest-only lending from Australian authorised deposit-taking institutions (ADIs) fell sharply in the June quarter.
“In flow terms, interest-only lending slowed to 30% of total new loans in the June quarter, down from 36% in Q1,” said Tom Kennedy, economist at JP Morgan.
“As a result, the stock of interest-only lending contracted for the first time since 2009, with aggregate interest-only lending values slumping by $2.3 billion.”
This chart from JP Morgan shows the sharp decline in the proportion of interest-only lending during the June quarter, leaving it at the lowest level since early 2009.
Along with a slowdown in new interest-only lending and outright decline in the total value of interest-only loans, Kennedy said that there was also evidence banks are becoming more selective in their loan criteria, particularly in regard to high loan-to-valuation (LVR) lending.
“The share of loans with an LVR higher than 90% has fallen further to 6.9% of total loans, while the share of lending to borrowers with deposits of more than 20% continues to increase,” he says.
That will no doubt please APRA who, within its 30% cap on interest-only lending, told ADIs that they should adhere to strict internal limits on the volume of interest-only lending at loan-to-value ratios of 80% or above.
Along with signs that investor housing finance is also starting to cool, Kennedy says that today’s data suggests that not only are APRA’s measures having an effect on lending flows, but they’re likely to remain in place for some time yet.
“We view today’s release as confirmation that the introduction of enhanced macro-prudential measures are having an effect on lending flows,” he says.
“The size of the aggregate mortgage book means progress on the stock of loans is likely to be gradual, particularly given the very large share of IO loans that remains even after the adjustment in Q2.
“As such, bank lending will continue to be restricted by these macroprudential measures, while the introduction of further requirements or regulation is not out of the question.”
However, while today’s data suggests that attempts to rein in financial risks in the housing market are working, not everyone is sure that they won’t create additional financial and economic risks as a consequence.
Only last week Australia’s Housing Industry Association (HIA) warned limits on investor activity, along with higher stamp duty charges and visa changes for foreign buyers, risked exacerbating Australia’s residential construction slowdown over the next two years.
That, in turn, could create downside risks for Australian economic growth, potentially placing upward pressure on unemployment and downward pressure on household spending levels as highlighted by Westpac’s chief economist Bill Evans earlier this year.
Those concerns were no doubt fanned further today following news that Australian new home sales fell to a four-year low in July, driven by a sharp slump in apartment sales, dwellings typically favoured by housing investors.
Data from CoreLogic later this week is also likely to reveal a sharp deceleration in house price growth across Australia’s capital cities over the past three months.
Those potential risks explains why the RBA said in the minutes of its August monetary policy meeting that Australia’s housing market and the balance sheets of Australian households continue to warrant “careful monitoring”.