The financial regulator has publicly revealed what it will take for it to step into the red hot property market

APRA needs more convincing before it will step into a hot property market. (Peter Rae, SMH)
  • The Australian Prudential Regulation Authority (APRA) has named the four key indicators it is watching as the property market heats up.
  • Wayne Byres, chair of the regulator principally concerned with lending, admitted “household debts are undeniably high” but maintained growth wasn’t yet unsustainable.
  • “There does not seem cause for immediate alarm. Nor, though, for complacency,” Byres said.
  • Visit Business Insider Australia’s homepage for more stories.

As prices roar higher across the country, Australia’s financial watchdogs look reluctant to cool a property market that is running red hot.

In the face of growing speculation, lending regulator APRA has for the first time gone public with what would compel it into action.

Speaking to the AFR Banking Summit on Tuesday, APRA chair Wayne Byres admitted there were several metrics that were collectively being considered a proverbial canary in the coal mine.

The first warning sign is the rate at which lending growth outstrips income growth, a key indicator of whether or not rising household debt is sustainable.

Byres said APRA was also keeping a close eye on three other numbers that indicate the level of risk borrowers are taking on.

High debt-to-income ratios are one such indicator and are already rising, with loans more than six times household income projected to soon hit 20%.

Another is high loan to value ratios which indicate the size of a deposit buyers are putting up. The sharper the rise of prices, and thus loans, the smaller the percentage of the deposit becomes.

Last but not least is the proportion of new loans that originate with a broker, versus directly with a lender.

What APRA knows, and what most of Australia could instinctively guess, is that each of these four indicators are already rising as more buyers, encouraged by low interest rates, outbid and out borrow each other as they compete for housing.

The reality is that APRA is more concerned with the rate at which each of these rise, versus the fact that they are in fact rising.

Despite APRA making it clear it’s comfortable with “undeniably high debt levels” for now, there’s no guarantee that will remain the case.

“On the radar, however, are signs that housing credit growth is picking up, and likely to outpace income growth for the foreseeable future. At an aggregate level, lending statistics do not show major signs of a return to higher risk lending,” Byres said.

“We are digging into this more deeply, as you would expect [and] we expect that bank boards, management teams and credit risk officers are interrogating these trends closely too. They should certainly be expecting questions from us on it.”

APRA and the RBA have both gone to pains to point out that that neither are responsible for ensuring house prices don’t go through the proverbial. Instead, what they are concerned by is unsustainable lending growth.

Easing some anxiety for APRA is the fact that the ability of borrowers to make their repayments is being “supported by historically low interest rates”.

Rising debts are the product of a “relatively high share of first home buyers entering the market”. As at least one property analyst counters, this demographic defaulting should actually raise greater concerns.

Despite all the risks, APRA simply doesn’t count them as high enough.

“It is a nuanced picture. There does not seem cause for immediate alarm. Nor, though, for complacency,” Byres said.

Right now though it appears it’ll take a lot more to force anyone’s hand.

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