Mortgage lending on APRA radar amid ‘heightened risks’

Addressing the Senate Economics Legislation Committee in Canberra yesterday, APRA chairman Wayne Byres said the prudential regulator’s supervisory work on housing lending standards is ongoing, and that more may need to be done to avoid an erosion of existing lending standards.

“Given the environment of heightened risks, our objective has been to reinforce sound lending standards, particularly in relation to the manner in which lenders assess the capacity of borrowers to service their loans,” Mr Byres said.

“Over the past year, we believe the industry has appreciably improved its lending standards. But risks within the housing and residential development markets remain elevated,” he said.

“We are therefore giving thought to how best to have improved standards firmly embedded into industry practice, such that they are not eroded away again over time.”

Mr Byres’ comments follow the Reserve Bank of Australia’s fresh warning that the foreshadowed risk of oversupply in some apartment markets is nearing and could see off-the-plan purchases fail to settle, particularly in Brisbane, Melbourne and Perth.

The RBA’s Financial Stability Review, released last week, noted that a large number of new apartments has started to come on line and cautioned that as more completions are expected in the coming two years, this could see increased risks in several major Australian cities.

Interestingly, the Reserve Bank highlighted that tighter lending standards and a greater difficulty achieving the required level of pre-sales has led some developers to adopt buyer incentives, delay their building projects, or, in severe cases, sell their development sites.

Banks have made a number of policy changes over the last six months as fears mount over how Australia’s off-the-plan market will perform over the coming years.

One boutique lender is confident that any risks will be mitigated by existing lending standards. According to Qualitas group managing director Andrew Schwartz, the Australian construction finance market is predicated on the need to secure presales at a level that’s at least equal to 100 per cent of the construction loan raised by a developer, before development can commence.

“This presale coverage ratio has been required by Australian banks for decades and has created a very prudent standard of lending,” he said.

“It reduces the risks of oversupply, thanks to the non-speculative nature of the sales commitment upfront. Moreover, the buyers need to be diversified, as the banks limit any one buyer from purchasing multiple apartments.”

[Related: Aussie banking system 'remains in good shape']