Australia’s Council of Financial Regulators reveals warning to banks on home loan risks
Financial watchdogs warn banks not to go easy on home loans, as they watch the risks of borrowing outpacing income growth.
The nation’s financial watchdogs are on alert amid signs of “increased risk taking” in the booming housing market and exploring options to curb home lending, as the prudential regulator seeks assurances from the major banks that lending standards haven’t dropped.
The Council of Financial Regulators at its quarterly meeting earlier this month discussed what might be the “appropriate options to employ” should house prices accelerate and outstrip growth in incomes, saying such an outcome was “not in the country‘s interests”, particularly in an environment of high debt, RBA boss Phil Lowe said at an event in Toowoomba on Thursday.
Regulators are “not at the point” where they are “actively considering implementing any initiative, but we are doing the preparation of what we might do” should credit growth take off, Dr Lowe said.
He said regulators were “looking at debt to income ratios, loan to value ratios and the type of restrictions we saw a few years ago”, which included limits on lending to investors and the pace of interest-only mortgages.
The Council of Financial Regulators, made up of the Reserve Bank, Treasury, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission, held its quarterly meeting on June 11 and determined that, overall, lending standards in Australia remain sound.
But with house prices set to rise further in the coming months, the council emphasised the need for lenders to proactively manage risks in their portfolios.
“Over the past few years owner-occupiers have accounted for most of the increase in household borrowing. The demand for credit by investors has been subdued, but is now increasing,” the council said in its quarterly statement released on Thursday.
“There have been signs of some increased risk taking recently, but overall lending standards in Australia remain sound.
“APRA has written to the largest Authorised Deposit-taking Institutions (ADIs) to seek assurances that they are proactively managing risks within their housing loan portfolios, and will maintain a strong focus on lending standards and lenders’ risk appetites.”
The powerful financial council also said it was paying close attention to the implications of trends in household debt, as it flagged the possible introduction of macroprudential policies to take some of the heat out of the market.
“(Members) discussed the risks that could build if growth in household borrowing substantially outpaced that in income, as well as potential policy options to address these risks,” the council said.
House prices across the nation have surged this year as the economy rebounded from the brief hit it took in 2020, with residential property prices jumping 5.4 per cent in the March quarter, in the biggest rise since 2009.
Australia’s home market is now worth more than $8 trillion, while average dwelling prices in NSW have pushed above $1m for the first time.
The housing boom this time around has not been confined to the east coast, with values up by more than 1 per cent in every capital city in May, building on the gains of prior months.
CoreLogic’s home value index jumped 2.2 per cent in May, while in March, the index recorded a 2.8 per cent rise, a 32-year high.
Economists see house prices rocketing up to 15 per cent this year as investors push into the booming market, with UBS’ George Tharenou not expecting APRA to intervene until November.
New Zealand’s central bank, also grappling with a hot housing market, this week said debt-to-income restrictions on mortgages would be “the most effective additional tool” in taking some heat out of the market, by reducing investor activity without undermining first-home buyers.
APRA may employ a similar tool if it does indeed step in to protect against the risk of overleveraged borrowers.
The Council of Financial Regulators at its June meeting also discussed the financial risks arising from climate change.
APRA’s draft prudential practice guide on climate change financial risks, which will apply to ADIs, insurers and superannuation funds, would help to prepare financial institutions to manage these risks, the council said.
The guide sets out high-level principles for how APRA expects institutions to evaluate and mitigate financial risks related to climate change.
A second initiative that sees council agencies collaborate on APRA’s climate change financial risk vulnerability assessment of the five largest banks will model institutions’ exposures to physical and transition climate change risks and will also help lenders prepare to manage the looming risks, the council said.
APRA intends to publish aggregate findings by the end of the year.
Council members also discussed the changing attitudes of investors to climate change risks and the importance of appropriate disclosures.
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