Regulators alert to housing hardship lift, as concerns grow over commercial property contagion

The peak body for Australia’s financial regulators has sounded a warning over worries more people are falling behind on their mortgages.

The peak body for Australia’s financial regulators has sounded a warning over worries more Australians are falling behind on their mortgages. Picture: Max Mason-Hubers

Australia’s regulators are growing increasingly concerned over a jump in home loan hardship for mortgage holders, amid worries of the potential for a commercial property lending crisis to spill over into local markets.

In the notes of its latest meeting, the Council of Financial Regulators revealed warnings regulators were seeing a “materially” higher lift in hardship applications from households to lenders from their very low levels during the pandemic.

The CFR, which represents the Reserve Bank of Australia, the Australian Securities and Investments Commission, the Australian Prudential Regulation Authority and Treasury warned the risks to the Australian financial system from households “warranted ongoing close attention,” but the peak body noted these risks “remain contained for the time being”.

The statement reveals representatives from ASIC, the corporate regulator, discussed observations of borrowers seeking financial hardship assistance from their lenders over recent months.

ASIC intervened in financial markets in August last year to warn lenders to lift their hardship application processes, in an open letter to 30 lenders.

This was soon followed by legal action in September by ASIC against Westpac, taking aim at the bank’s failure to respond to hardship notices.

The CFR noted ASIC said it was seeing an increase in households falling behind on loan payments, although pointing out this was coming off an ultra low base, but warning this would see “some further increase in the period ahead”.

“The Council noted that the risks to household balance sheets, and in turn financial stability, would increase if inflation were to remain high for longer than anticipated or if labour market conditions deteriorate more than expected,” the CFR said.

This comes as several ratings agencies have charted an increase in home loan arrears, with non-prime borrowers representing self-employed workers or those with poor credit ratings bearing the brunt of the mortgage market deterioration.

This comes as interest rates have stayed at their highest level in 13 years, after the RBA moved to lift rates to 4.35 per cent in November last year.

The warnings from CFR, which meets quarterly to hold roundtables of Australian financial regulators, are a marked increase from the relatively benign statements offered in recent meetings.

In the notes of its latest meeting, the Council of Financial Regulators revealed warnings regulators were seeing a “materially” higher lift in hardship applications from households to lenders. Picture: Max Mason-Hubers

In December, the CFR said high household leverages had “potential to pose risks to the financial system and economy”.

The latest statement from the council noted regulators discussed Australian lending standards which were playing a key role in “supporting financial system resilience”

“Preliminary insights from the recent annual Hypothetical Borrower Exercise, where banks provide APRA with serviceability assessments for different types of borrowers, were consistent with other data sources suggesting that bank lending standards had remained sound despite the competitive lending environment,” the CFR said.

APRA, the prudential regulator charged with overseeing banks, copped criticism in 2023 after the regulator maintained its 3 per cent serviceability buffer for lending after the CFR backed in the move.

However, some lenders, including CBA and Westpac, have sliced the buffer down to 1 per cent for borrowers who have not missed payments and have high equity after APRA told lenders they could be reduced in “limited” and “exceptional” circumstances.

The council’s statement also reveals concerns among regulators for the risk of a potential banking crisis in other markets could spill over to Australia’s commercial property sector, as many owners have looked offshore to fund purchases.

The CFR noted “challenging conditions in global and Australian commercial real estate markets”.

However, the CFR said these risk “were assessed to be contained due to banks’ low exposures, conservative lending practices and the relatively strong financial positions of (commercial real estate) owners”.

But the CFR said stress in overseas commercial real estate markets could be transmitted to domestic markets through foreign ownership and common sources of funding amid the need for local owners to refinance amid challenges in some overseas markets, which were expected to increase.

Visibility of foreign lending in commercial real estate markets trouble the CFR, which noted more work was needed to improve oversight of the sector and the use of debt by unlisted property trusts to purchase assets.

The CFR also said risks to the financial system from cyber attacks have continued to increase in scale and complexity as businesses increased their reliance on technology and third-party service providers.

It also discussed the fast pace of growth in the uses of artificial intelligence in the financial system and agreed to deepen its analysis of related risks.