Wayne Byers delivered a speech Wednesday where he highlighted that by global standards, Australian banking has a scary concentration in housing loans.
That begs the question of what exactly Byers, and his team at APRA, might do to rein in the risk that such a concentration poses for the Australian economy and financial stability.
Deutsche Bank analysts Andrew Triggs and Anthony Hoo released a research note after Byers’ speech which soought to answer that question.
Triggs and Hoo said that, “while APRA is clearly concerned about potential (and rising) risks in the housing market, their mantra remains not one of controlling property prices, but ensuring ADI lending standards reflect the heightened risk.”
If they’re not worried about prices, what might they do about risk?
Here Triggs and Hoo highlight that Byers suggested that APRA is prepared to take further steps if banks don’t react positively to recent initiatives to slow the rate of investment lending and what APRA clearly perceives as increased risk in banks mortgage books.
No doubt the banking sector, keen to avoid heavy-handed oversight from APRA, will be brought to heel. But Triggs and Hoo said that if APRA doesn’t get the “desired results” there are a number of actions open to it.
i) A further tightening of lending standards;
ii) Taking action in respect of individual banks;
iii) Changing capital requirements for specific loan classes (e.g. investor or interest-only housing); and
iv) Turning on the counter-cyclical buffer. Of these, we believe the banks would most want to avoid the latter.
Overall though, Triggs and Hoo are pretty relaxed about the outlook for the banks at the moment saying that “while concerns about housing market imbalances appear entirely justifiable to us we do not necessarily think there are endemic problems in the major banks’ housing books, nor do we see a serious housing correction as our base case.”
That’s good news.
But, like APRA and many observers, they would be “encouraged by a reduction in house price/investor lending growth rates”.