- Of all the factors that have contributed to the slowdown in Australia’s housing market in recent years, none has been as influential as APRA’s crackdown on risky mortgage lending.
Earlier this year, APRA told lenders to “develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels, and policy limits on maximum debt-to-income levels for individual borrowers”.
- APRA Chair Wayne Byres is expected to elaborate upon that request in a highly-anticipated speech tomorrow.
Of all the factors that have contributed to the slowdown in Australia’s housing market in recent years, none has been as influential as APRA’s crackdown on risky mortgage lending.
Three-and-half years after this process began, it’s already left its mark on Australia’s property market, especially in Sydney and Melbourne.
Prices are falling in many of Australia’s largest and most expensive property markets, mirroring so many other housing market indicators at present.
From restricting annual credit growth to investors to limiting new interest-only loans, APRA’s restrictions have succeeded in cooling the housing market despite official interest rates from the Reserve Bank of Australia (RBA) remaining at the lowest level on record.
Now APRA’s crackdown appears to be evolving again with the regulator instructing Australian authorised deposit-taking institutions (ADIs) earlier this year to “develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels, and policy limits on maximum debt-to-income levels for individual borrowers”.
Restricting the proportion of lending to highly-indebted borrowers, or those seeking a large loan compared to their income level, essentially.
“This provides a simple backstop to complement the more complex and detailed serviceability calculation for individual borrowers, and takes into account the total borrowings of an applicant, rather than just the specific loan being applied for,” APRA said.
However, since that request was made back in April, there’s been few specifics provided by APRA, leading to all sorts of speculation that it could lead to a substantial slowdown in mortgage lending, or worse.
The term “credit crunch” has been seen regularly in many analyst notes.
Thankfully, we might be about to get some clarity as what these potential changes may mean for not only borrowers, but also the wider housing market, with APRA Chair Wayne Byres set to deliver a key speech tomorrow entitled “Developments in housing markets”.
Byres is expected to discuss APRA’s current views of the mortgage lending market, its regulatory and supervisory strategy, as well as the health of bank balance sheets.
There’s likely to be a bit of interest given the impact its previous regulatory changes.
UBS Equity Analysts Jonathan Mott, Rachel Finn and Karyn Cao expect Byres’ speech will focus on process improvements to better capture living expenses among borrowers.
“While the major banks have implemented income-adjusted household expenditure measure (HEM) benchmarks which has contributed to a reduction in owner-occupier and investor maximum borrowing capacity, Byres has recently stated in a media release in April that ‘ADIs should not rely on benchmarks, which may not be a replacement for making reasonable inquiries’,” UBS says.
“Given that the banks have substantial amounts of valuable data on where customers spend their money [such as] card payments, direct debits, electronic transfers, digital wallets, Apple Pay, Samsung Pay, Android Pay, Fitbit Pay, Garmin Pay, we would expect the banks to start analysing this data to calculate a customer’s living expenses.”
Along with better ways in which to capture household expenses, they also expect Byres to provide further detail on internal policy limits for “very high” Debt-to-Income (DTI) borrowers.
“We expect [he’ll] discuss APRA’s interpretation of internal limits for ‘very high’ DTI borrowers and what is an appropriate threshold for the proportion of loans that are approved with DTI above 6 times,” UBS says.
“We believe that until Comprehensive Credit Reporting is up and running, and unless a customer is forthcoming about their full financial position, the banks may not have an accurate idea of what their customer’s DTI is.”
Mott, Finn and Cao believes Byres may discuss what APRA’s tolerance for “very high” DTI currently is, and whether lenders will be provided with maximum DTI level for individual borrowers moving forward.
On what is an otherwise quiet data week in Australia, Byres’ speech will undoubtedly attract a lot of attention.
It’s scheduled to begin from 1pm in Sydney.
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