There can be no doubt that Australian banks and Australian banking had an overly concentrated lending book in housing after looking at this chart Wayne Byers, chairman of Australia’s prudential banking regulator – APRA, presented at a lunch to the Australian Business Economists today.
Byers analysed the housing finance sector, trends, risks factors and the overall housing finance market.
But in many ways it was the first chart in the very first couple of paragraphs in his speech which highlights why APRA, and the RBA, has been so aggressively forcing the banks to rein in investor lending. It also explains why APRA also wants banks to better understand the risk of the mortgage book on balance sheet via prudential standards like CPS 220, Risk Management, and APG 223 which is a “prudential practice guide’ specifically for residential mortgage lending.
The Australian banking system is noteworthy for the predominance of housing loan assets. Lending for housing has traditionally been safe and profitable and, as a result, has grown to become the largest business line for many Australian banks. Building societies have, of course, always been focussed on housing, and over the past couple of decades credit unions have transformed themselves into housing lenders as well. Housing lending now accounts for around 40 per cent of banking industry assets, and a little under two-thirds of the aggregate loan portfolio. With such a concentration in a single business line, we are all banking on housing lending remaining ‘as safe as houses’.
Now if something works as a business line it makes sense to reinvest to growth that line. But clearly Byers is implying their is no guarantee Australian banking will always be “as safe as houses”.
Indeed Byers suggests a perfect storm could hit the banking sector if the economy slows down noting that “the environment for housing lending is one of relatively high house prices, high household debt, historically low interest rates, and subdued income growth.”
“As a result of this APRA is certainly intensifying its scrutiny of portfolio risk profiles,” Byers added.
That sounds like the prudent thing to do.