Growing imbalances in the housing market pose a long term challenge to the credit profiles of Australian banks, says Moody’s in a market analysis.
“The Australian housing market is characterised by elevated and rising house prices, declining mortgage affordability, and record levels of household indebtedness,” Moody’s says.
However, the ratings agency sees recent moves by the banks to slow investment lending growth as positive. The changes include reducing interest rate discounts for investors and adding caps to loan-to-value ratios.
Without that, it says, the increasing proportion of investment and interest-only loans would lead to a weakening of the portfolio quality at the banks.
Here’s what the banks have done:
The Australian Prudential Regulation Authority (APRA) has increased scrutiny of the investment lending for housing, writing to lenders in December 2014, setting out a benchmark of 10% per a year on loan growth.
Investment lending has been growing rapidly since 2013, reaching a record 37% of total new mortgages and fuelling concerns about the sustainability of the housing market.
“A part of investment lending is likely to be fuelled by speculative considerations,” says Moody’s.
“Investment loans are also more likely to be interest only and, consequently, are more sensitive to movements in interest rates than loans owner occupied or principal-and-interest loans.”
Moody’s says its expect banks to further tighten lending criteria.
“It is likely that further initiatives will be required during 2015 to bring investment lending in line with regulatory guidelines,” Moody’s says. “Our expectations of more conservative loan originations and increasing capital continue to support our stable outlooks on the ratings of Australia’s four major banks.”