Wayne Byers, the chairman of Australia’s banking regulator, APRA, gave a great explanation of why he is cracking down on bank lending when he appeared before the House of Representatives Standing Committee on Economics Inquiry into Home Ownership in Sydney yesterday.
He said very clearly that it is not just house prices that have prompted the crackdown on banks’ lending practices but the combination of prices, debt levels, super low interest rates and low income growth which has raised concerns at the regulator.
It is important to note that APRA’s concerns are not driven solely by housing price growth in the major markets of Sydney and Melbourne. Our objective has been to ensure that in the broader environment of high house prices, high household debt, historically low interest rates and subdued income growth – along with strong competitive pressures within the financial system – sound lending standards are maintained across the board. Thus far, we have not imposed formal regulatory requirements in relation to lending practices: put simply, we have requested banks to take a prudent view of borrower income, ensure they are not underestimating a borrower’s living expenses, and allow for the fact that interest rates will not always be as low as they are today. None of this should be seen as anything other than common sense. Our greater scrutiny has, however, prompted some changes to market practice as more aggressive lending has moderated.
He highlighted that the new measures it had instituted and discussions that APRA was having with lenders have been taken “to reinforce sound lending standards in the housing sector. As we have noted, these efforts are not targeted at promoting home ownership or housing affordability. Rather, our goal has been to preserve the financial strength of the banking sector.”
That’s a theme the Luci Ellis, the RBA head of the Financial Stability Department, also touched on when she appeared before the committee to present the RBA’s submission.
Housing market developments are also highly relevant to the Reserve Bank’s mandate to promote financial stability. Housing is the most important asset class for the household sector; it provides security for the finance of many small businesses; and housing-related lending represents a large fraction of the business of the Australian banking system. History shows that housing loans have not generally been as risky as other loans, but such is the size of the sector, the risks involved are nonetheless important. Recent history from around the world also shows that although households’ mortgage borrowings typically do not instigate financial crises and distress, they can do so if the institutional arrangements and lending standards are configured to allow it. Australia is a long way from that situation and we want to ensure that remains true.
Clearly the RBA and APRA are working together and it’s not just about investors. Rather, it’s about the instability investors might cause in the market as a whole.