FITCH: More macroprudential tightening ahead on home loans

A corrugated iron shack in Coober Pedy. Mark Kolbe/Getty Images

The move this month by Australia’s banks to increase mortgage rates for owner-occupiers should help cool growth in lending to more vulnerable borrowers, according to ratings agency Fitch.

However, high household debt and rapid property price rises are already key risks to the performance of the banking sector, says Fitch in its latest review of Australia’s major banks.

And the ratings agency now expects further macroprudential tightening to rein in home lending.

“The continuing pick-up in investor activity in the property market is likely to be the main target in the next round of macroprudential tightening,” says Fitch.

“We expect the regulators to impose stricter mortgage-lending standards and perhaps lower the cap on annual growth of investor mortgages from the current 10%.”

Fitch in January revised its outlook on Australia’s banking for 2017 to negative from stable.

The change follows that of Moody’s, which in August last year changed the outlook for the banking system to negative from stable.

Profits at Australia’s banks are under pressure. The combined cash profits of the big four banks didn’t make last year’s record $30 billion.

In the review released today, Fitch says the lending rate increases were prompted by expectations of further macroprudential tightening and of higher funding costs on the back of further US rate hikes.

“Higher US interest rates are likely to push up the cost of wholesale funding, which the major banks rely on due to the general lack of deposits in Australia,” Fitch says.

However, Fitch believes the latest lending rate increases were mainly driven by rising pressure to rein in some riskier forms of lending ahead of a probable regulatory tightening.

This chart shows how debt has risen as interest rates fall:

Households are sensitive to increases in lending rates due to high debt, low wage growth and the vast majority of Australian mortgages being based on variable interest rates.

Fitch says the household debt/disposable income ratio reached 187% in September last year, which was high by global standards.

“A house price correction following unsustainable price gains over the last decade, particularly in Melbourne and Sydney, could erode the strong equity cushions currently held by many mortgage borrowers,” says Fitch.

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