Systemic risks in Australia’s housing market have been the main topic of concern for pundits and regulators alike lately.
To that end, the Australian Prudential Regulation Authority (APRA) rolled out its latest round of macro-prudential (MacroPru) measures at the end of March, aimed at curbing speculation in the Sydney and Melbourne markets.
Chief among the new measures is a restriction on interest-only lending to no more than 30% of new loans issued.
Since 2008, interest-only loans have comprised about 38% of total loans issued. This chart from Morgan Stanley provides some useful historical perspective on the prevalence of interest-only loans in the housing market.
The figure rose as high as 44% — or $126 billion worth of loans — in 2015 before the effect of APRA’s previous MacroPru restrictions, when it put a cap on the number of new investor loans banks could issue.
Morgan Stanley also said that loans with a loan-to-value ratio of more than 90% still make up around 9% of new loans issued.
The bank said that assuming no increase in the amount of principal and interest loans, the new restrictions would reduce the total of interest-only loan issuance by between $36 billion and $77 billion in 2017.
Looking at the chart, a reduction at the lower end of the range would take interest-only loan issuance back to the levels seen between 2009 and 2012.
Morgan Stanley said that “in practice we would expect a pick up in principal and interest, so the contraction in credit is unlikely to be this large”.
“We note that every ~5% or ~$8 billion increase in new principal and interest approvals would allow an extra ~$4 billion of new interest-only loans,” the bank said.
Morgan Stanley said that it currently takes a negative view of the Aussie banking sector. The bank considers that current trading multiples are overstated, given headwinds to revenue, possible loan losses and the likelihood that the latest MacroPru measures will require banks to raise some more capital.