The crackdown on risky mortgage lending in Australia is now largely complete

Mark Kolbe/Getty ImagesSunrise in Sydney.
  • APRA, Australia’s banking regulator, says the crackdown in risky mortgage lending in Australia is now largely complete.
  • It says any additional tightening of lending standards will now be “at the margin”.
  • The regulator outlined process improvements underway to better estimate borrowing capacity for those with existing debts.

The head of Australia’s banking regulator says the crackdown on risky mortgage lending in Australia is now largely complete, and that additional tightening of lending standards will now be “at the margin”.

“Any tightening from here on is expected to be at the margin as banks seek to get a better handle on borrower expenses, and better visibility of borrower debt commitments,” APRA chair Wayne Byres told the Australian Business Economists Forum in Sydney today.

“Over the past few years, APRA has seen clear improvements and moves to better practice. While we remain alert to slippage, our current stance is one in which, having made good progress on a return to sound lending standards.”

APRA has introduced a range of constraints on bank lending over recent years to bolster financial stability and curb speculation in the property market. The measures have been a significant factor in the moderation in house price growth across Australia.

“This has been an orderly adjustment, and we expect it to continue over time. While there is more “good housekeeping” to do, the heavy lifting on lending standards has largely been done.”

Byres pointed to a raft of recent information to underline his point about improvements in lending standards, noting the proportion of new lending at high loan-to-valuation ratios (LVRs) has declined, both for lending to owner-occupiers and to investors, while loan growth to investors had also moderated.


“The share of interest-only lending has fallen to less than half the levels seen in recent years, with a notable decline in interest-only lending at high LVRs and at long terms,” Byres said.


Along with the introduction of a 10% annual cap on investor housing credit growth in late 2014 — which has subsequently been removed — and limiting the proportion of interest-only lending to 30% of all new loans, Byres said standards had been strengthened by more scrutiny on the ability of borrowers to service their outstanding debts.

“They have also coincided with a strengthening in the rigour with which banks assess borrowers’ ability to service and repay their loans,’ he said.

“Together with the benchmarks we set on investor loan growth and interest-only lending, which eased unhealthy competitive pressures, the heightened scrutiny applied to serviceability has produced a clear improvement in the quality of new lending.”

While Byres said this had “already yielded benefits” in providing more accurate forecasts of future borrower living expenses, he said change was already underway to improve these estimates even further for borrowers with existing debts.

“To improve the verification of borrowers’ pre-existing debts, many banks are preparing to participate in Comprehensive Credit Reporting (CCR),” he said.

“[The] CCR will provide much greater visibility of a borrower’s existing debt commitments, and in turn should furnish banks with an ability to enhance not only their serviceability assessments for new borrowers but also risk analytics for the mortgage portfolio overall.”

Byres said this should also see limits around loan size, relative to borrower income, evolve to controls on total debt relative to income levels.

“It may take some time for controls on total debt-to-income to be fine-tuned and properly calibrated, as data histories in Australia will initially be short,” he said.

“This is a key reason why APRA has been careful not to be prescriptive, and has left it to banks to determine the calibration of their policy and portfolio limits in accordance with their own risk appetite and experience.”

No blanket benchmark for all financial institutions, in other words.

In concluding, Byres said Australia’s banking system was financially sound, adding that it is their task is to keep it that way.

“It has been a long time since a serious economic storm hit the Australian financial system. Maintaining sound practices in good times, and remaining ready for stormy weather, are essential for a resilient banking sector,” he said.

“Of course, none of this will prevent storms from occurring, or provide a guarantee against a crisis. But it does at least give us greater comfort that, when a severe economic storm does next hit us, we are better prepared to navigate our way through it.”

For a $7 trillion marketplace, here’s hoping Byres’ is right.

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