Housing: APRA warns of risks from inflation, interest rates

APRA chair Wayne Byres says house prices could fall if interest rates rise too fast, as borrowers face rising inflation.

APRA chairman Wayne Byres (centre): ‘A generation of borrowers haven’t experienced material increases in rates.’

The head of the prudential regulator has warned of “pockets of stress” in Australia’s housing market as higher inflation hit home borrowers, noting a fast lift in rates would likely trigger price falls.

Australian Prudential Regulation Authority chair Wayne Byres has said some borrowers may struggle in the years ahead.

He said this was due to many businesses and households never experiencing “an inflationary period”.

“A generation of borrowers haven’t experienced material increases in rates,” he said.

“Not everyone will be prepared or know how to navigate it. Banks’ credit risk capabilities will be tested.”

However, he noted Australia’s banking system was “well-capitalised” and recent borrowing was supported by “lending standards that have been fairly sound in recent years”.

Speaking at the The Financial Services Institute of Australasia ‘The Regulators’ event Mr Byres said APRA would closely watch the housing market.

“We’ll continue to pay special attention to residential mortgage portfolios and housing lending standards given their importance to system stability,” he said.

“There’ll inevitably be pockets of stress, particularly if rates rise quickly and, as expected, housing prices fall.”

Mr Byres warning of APRA’s attention to the housing market comes after the regulator intervened in the housing market in late 2021, writing to banks to tell them to lift their loan buffers by 0.5 per centage points by October 31.

APRA made the move in response to runaway house prices that ballooned during the pandemic.

The regulator previously intervened in the housing market in 2014 to cap investor loans being written by the banks.

APRA again intervened in 2017 to cap interest-only loans the banks were offering to investors, in response to runaway price rises.

Mr Byres also noted price issues around general, health, and life insurance, noting it was growing increasingly unavailable and unaffordable.

“Be it because of poor product design, rising claim costs, increasing litigation, or a changing climate, insurers are increasingly raising the price and/or reducing the coverage of the policies they sell,” Mr Byres said.

“ While that may be a sensible business decision for individual insurers in the short run, in the long run it leads to premiums that become unaffordable, cover that is poor value, or even products that are simply not available.”

Mr Byres said APRA would seek to avert pricing issues and was attempting to address underlying drivers of problems across the sector.

“Addressing this issue is at the heart of our insurance industry strategy,” he said.

ASIC commissioner Cathie Armour: ‘We are watching business climate disclosures’

Separately at the same event Australian Securities & Investments Commission commissioner Cathie Armour warned the regulator was closely watching business climate disclosures.

Ms Armour said ASIC was reviewing statements from investment funds around net zero and “greenwashing” disclosures.

“We’re going to be on the lookout for greenwashing, you can expect we will have much more to say on this in the next little while,” she said.

Ms Armour said ASIC was “sharpening” its regulatory focus “in these interesting times”.

APRA and ASIC have repeatedly warned businesses around climate change risk disclosures.

The two regulators put their heads together in 2018, warning companies needed to consider the effects of climate change.

ASIC launched examinations in the first half of the 2019 financial year to review several large listed companies in the energy, financial, industrial, property and consumer discretionary space.

ASIC has fired off several letters to company directors warning they needed to disclose risks posted to their business by climate change.

But Ms Armour has also targeted companies greenwashing their activities, warning companies caught obfuscating their green credentials could face action.

Ms Armour has noted directors found to be greenwashing could be found to be making misleading and deceptive statements in relation to financial products.

Originally published as Housing: APRA warns of risks from inflation, interest rates