Lending brake was hit too hard: ANZ

Reserve Bank directors are also concerned that further house price falls could slow economic growth due to lower consumption.

ANZ chief executive Shayne Elliott. Picture: AAP

ANZ Bank has admitted it hit the brakes too hard last year in home lending, as minutes from this month’s Reserve Bank board meeting revealed the directors’ concern that further price falls could slow economic growth due to lower consumption.

In its risk update for the December quarter, ANZ said its domestic home loan portfolio grew by only 1 per cent in 2018 compared with 4.2 per cent for the wider banking system.

While lending to the bank’s priority segment of owner-occupiers was up 3.5 per cent, the investor portfolio shrank by 3.8 per cent.

Worse was to come in the new year, with growth in the overall book barely shifting the dial at 0.4 per cent for the 12 months to the end of January.

Chief executive Shayne Elliott said customer sentiment remained subdued due to uncertainty about regulation and falling house prices eroding confidence.

“While we are maintaining our focus on the owner-occupier segment, we acknowledge we may have been overly conservative in our implementation of some policy and process changes,” Mr ­Elliott said.

“We are also taking steps to prudently increase volumes in the investor space.”

The RBA minutes of this month’s board meeting, released yesterday, showed that the weakening housing market’s impact on the broader economy was a major focus, with directors spending “some time” considering a paper on the impact of recent developments.

After rising by almost 50 per cent over the five years to September 2017, national prices fell by 8 per cent to return to mid-2016 levels, although Sydney and Melbourne were hit harder with falls of 12 per cent and 9 per cent.

The RBA noted that the falls in Sydney and Melbourne were large by historical standards, which was unusual in an environment of low interest rates and declining unemployment.

Directors said that, following such large price increases, the effect of the recent reversal on economic activity was expected to be “relatively small”.

“However, members observed that if prices were to fall much further, consumption could be weaker than forecast, which would result in lower GDP growth, higher unemployment and lower inflation than forecast,” the minutes said.

“From a financial stability perspective, tighter lending standards, an improving labour market and low interest rates were all likely to support households’ capacity to service their debt.

“Few households were in negative equity positions despite the falls in housing prices, implying that banks’ losses would be limited even if household financial stress were to become more widespread.”

One factor weighing on prices in recent years was lower demand from foreign buyers.

This was backed up yesterday by a UBS report, which pointed to data from the Foreign Investment Review Board showing the value of approvals to buy houses collapsed by 58 per cent in 2017-18 to $13 billion — the lowest level since 2009-10.

UBS blamed a number of factors, including tighter Chinese capital controls, an ongoing hike in taxes on foreigners, much greater scrutiny of applicants, and a tightening of credit to offshore buyers. Last year, the investment bank argued a collapse in foreign investment was one of seven factors that could contribute to a credit crunch.

The RBA minutes showed the central bank maintained its view that slower growth in lending mostly reflected weaker demand instead of supply constraints.

But the central bank also agreed credit conditions for some borrowers were tighter than they had been for some time after the strengthening of lending policies and practices over recent years.

“Liaison with mortgage brokers suggested that the increased public scrutiny associated with the (royal commission) may have led some individual loan assessors at banks to apply stricter criteria than specified in official lending requirements,” the minutes said.

“However, banks reported that while loan assessors had been referring more approvals to credit officers, final loan approval rates had remained high.”

ANZ’s quarterly risk update listed almost a dozen policy changes that tightened lending practices in domestic home lending over the period June 2015 to December 2018.

They included caps in loan-to-valuation ratios, product and other limitations such as stricter requirements for guarantees and no more lending to non-residents, and more diligent loan assessment processes implemented in the second half of last year.

Among the changes in the latter category were a 7.25 per cent interest rates floor, limited acceptance of foreign income to demonstrate serviceability and tightened controls on verification, as well as enhanced responsible lending requirements.