Australia's Bank Regulator Is Stepping In On Risky Home Lending

Getty/ Jeff J Mitchell

APRA (the Australian Prudential Regulation Authority) is taking aim at risky home lending and increasing surveillance of the banking sector.

The regulator says it’s taking steps to “reinforce sound residential mortgage lending practices”. The new policies are a result of discussions at Australia’s Council of Financial Regulators (RBA, APRA, Treasury, ASIC).

For the moment, this is a light touch move with no increases in “capital requirements”, or caps on particular types of loans, to “address current risks in the housing sector”.

In a note to clients, UBS economics said:

APRA is flagging with ADIs (banks) that it will be paying particular attention to specific areas, including:

– higher risk mortgage lending, evidenced by high LVRs (loan to valuation ratios), interest only loans to home-owners and loans with very long terms;

– portfolio growth to investors materially above a 10% y/y threshold; and

– loan affordability tests, including an interest rate buffer of at least 2%, and a floor lending rate (for the serviceability test) of at least 7%.

APRA said it “will be reviewing ADI lending practices and, where an ADI is not maintaining a prudent approach” non-compliance will lead to “further supervisory action”, including perhaps an additional capital requirement for that institution.

Wayne Byers, APRA chairman, noted that, “while in many cases ADIs already operate in line with these expectations, the steps announced today will help guard against a relaxation of lending standards and, where relevant, prompt some ADIs to adopt a more prudent approach in the current environment.”

Here’s the UBS economics team’s view of the impact of the restrictions.

Our initial judgement is that while these aren’t particularly aggressive macro-prudential rules, they will likely slow the pace of lending to housing, particularly to investors, over coming months, even though we suspect most investors would continue to pass these more stringent tests. As at October, economy-wide lending growth to investor housing was 9.9% y/y, fractionally below the threshold. However, the greater focus by APRA on this metric is likely to see ADIs “ack away” from this rate. Further, while some major banks are likely below this pace, some are not, and there are some non-major lenders growing their balance sheets at significantly faster than this. In addition, it is likely that some loans over recent months have been made with serviceability tests below 7%.

For policy, today’s measures target the RBA’s concern about the unbalanced nature of housing lending, and its bias toward investors and interest only loans. In addition to already slowing house price growth, this clearly gives the RBA more scope to ease, if it judged this necessary. We continue to view economic growth as not sufficiently slow, or at risk, for the RBA to cut rates at this time. However, these measures over time may allow them more scope to remain on hold at their current record low cash rate

Equally the move will address any rush by investors and SMSF (self managed superannuation fund) trustees keen to get in before the Murray recommendation that leverage in superannuation be banned.

Here is a link to APRA’s release.

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