Mortgage market becoming ‘unbalanced’, says RBA

In its much anticipated Financial Stability Review, released yesterday, the RBA said that the main risk as a result of strong investor activity is that the extra demand may intensify the housing price cycle and increase the potential for prices to fall later.

While the RBA noted that the pick-up in household risk appetite and subsequent increase in property prices is natural given the low interest rate environment, the composition of housing and mortgage markets “is becoming unbalanced”.

“This has been most evident in the current strength of investor activity in the housing market, and in its concentration in Sydney and Melbourne,” it said.

“The apparent increase in the use of interest-only loans by both owner occupiers and investors might also be consistent with increasingly speculative motives behind current housing demand.”

The increasing household appetite for risk over the past year has been fuelled by low interest rates, inflated house prices and strong price competition among lenders, the RBA said.

“Accordingly, household credit growth has picked up, almost entirely driven by investor housing credit, which is growing at its fastest pace since late 2007,” it said.

The RBA stressed that the increase in household risk appetite is most evident in the continued strength of investor activity in the housing market, particularly in Sydney and Melbourne.

Investor housing loan approvals are almost 90 per cent higher in New South Wales than they were two years ago and are 50 per cent higher over the same period in Victoria.

As a share of approvals, both are back around previous peaks.

By contrast, the momentum in the owner-occupier market has slowed over the past six months, with loan approvals largely unchanged.

The RBA has warned the banks to consider the “system-wide risks in property markets” in their lending decisions.

Recent speculation over the potential introduction of macroprudential tools – such as LVR limits and loan serviceability buffers – has been widespread.

The latest JP Morgan Australian Mortgage Industry report raised concerns that the loan serviceability buffers of Australian banks are too low for borrowers to withstand rate rises.

Interest rate buffers are used to assess a borrower’s ability to meet mortgage repayments in the event of a rate rise.

The report singled out Westpac as an example of a lender with a buffer rate of 6.8 per cent, just under two per cent above the current rate of repayment on a standard mortgage.

“That serviceability buffer is actually around the 10-year average mortgage rate,” JP Morgan banking analyst Scott Manning said.

“If you are assessing buffer ability on averages, rather than stressed scenarios, we question whether that is sufficient and we think maybe the three per cent buffer that the UK is proposing actually makes a bit of sense,” Mr Manning said.

To help mitigate risks associated with investor lending, APRA has emphasised that banks apply an interest rate add-on to the mortgage rate, in conjunction with an interest rate ‘floor’, in assessing a borrower’s capacity to service their loan. 

“The lending behaviour of banks in this environment, including their adherence to prudent practices like the use of add-ons and floors in assessing serviceability, is particularly important; it is no surprise that APRA is keeping a close watch on this,” the RBA said.

“So far, it appears that banks’ lending standards have been holding fairly steady overall; while some elements or market segments have eased a little, others have tightened up a bit.”