Clancy Yeates| Sydney Morning Herald| 11 July 2018
Australia’s banks have largely completed a long-running campaign to bolster their mortgage lending standards, the financial regulator says, signalling it will not force banks to further slam the brakes on the home loan market.
In a speech that played down fears of a credit crunch, Australian Prudential Regulation Authority chairman Wayne Byres on Wednesday highlighted a decline in higher risk mortgage lending, and said banks were now better placed to survive a “very severe” financial crisis.
Mr Byres noted there had been a sharp reduction in interest-only lending, investor lending, and low-deposit lending, in part due to its crackdown on riskier mortgages over recent years.
One of the big unknowns in the mortgage market is whether banks may tighten lending further, potentially as a result of the royal commission, but Mr Byres suggested APRA would not be requiring any major further changes.
“This has been an orderly adjustment, and we expect it to continue over time,” Mr Byres said at an Australian Business Economists lunch in Sydney.
“While there is more ‘good housekeeping’ to do, the heavy lifting on lending standards has largely been done. 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.”
The comments, which come against a falling housing market, suggest APRA may not embark not embark on another round of macroprudential policies to dampen risks in the housing market, as some analysts had expected.
Bank shares, which have been dragged down by fears of slowing credit growth and falling house prices in recent months, bounced after Mr Byres speech but still finished the day lower than Tuesday’s close.
Deutsche Bank economist Phil O’Donaghoe said Mr Byres’ remarks were “upbeat,” and the fact his speech made minimal mention of house prices was “really important.”
“In our view, the speech reinforces the relative sanguine response from regulators to date about recent housing market developments,” Mr O’Donaghoe said.
However, Regal Funds Management portfolio manager Omkar Joshi said despite Mr Byres’ comments, banks were still likely to become more conservative in their lending decisions while they remained under scrutiny from the royal commission into misconduct in the financial sector.
“Lending standards have improved, but we’re still going to have credit growth slow down even further,” Mr Joshi said.
After initially capping lending to property investors in late 2014, APRA has in 2016 and 2017 put the microscope on how banks assess home loan customers’ living expenses, and Mr Byres said this remained a focus.
The other issue where APRA wants to see more progress is how banks’ assess a customer’s existing debts when they take out a loan – an area Mr Byres has previously referred to as a “blind spot.”
APRA is also requiring banks to introduce limits on lending with high debt-to-income ratios of six times or more, which is likely to highly-geared customers such as investors with multiple properties. However, Mr Byres said APRA’s debt to income rules would act as a “backstop” rather than a “primary constraint.”
Although mortgage lending has slowed notably in recent months, and economists expect this will continue, Mr Byres pointed to figures that showed total housing credit still expanded by 6 per cent in the year to May, only slightly below the pace of previous years. He also said lending to owner-occupiers had also grown at a “very healthy” 8 per cent.
APRA also revealed the results of 2017 stress tests, which found 13 of the largest banks’ would lose more than $40 billion on their mortgage portfolios under a “very severe” scenario of house prices falling 35 per cent, unemployment doubling to 11 per cent, and gross domestic product contracting by 4 per cent.
Despite the hefty losses, banks’ capital levels would remain above the regulatory minimum in these scenarios, Mr Byres said.