APRA: Direct ‘competitive instincts’ away from investors

APRA has been keeping a close eye on mortgage lending, Mr Byres said, particularly the quality of new lending – given housing represents the largest asset class on the banking industry’s balance sheet.

“We have lifted our supervisory intensity in a number of ways – collecting more data from lenders, putting the matter on the agenda of boards, establishing stronger lending standards that will serve to mitigate some of the risks from the current environment, and seeking in particular to moderate the rapid growth in lending to investors,” he said.

“These efforts are often tagged ‘macroprudential’, but in an environment of historically low interest rates, high household debt, relatively subdued wage growth, and strong competitive pressures, we see our role – in simple terms, seeking to make sure lenders continue to make sound loans to borrowers who can afford to pay them back — as really pretty basic bank supervision.”

Mr Byres said APRA’s recent efforts have generated a moderation in investor lending, which he noted was accelerating at double digit rates of growth but has now come back into single figures.

“We can also be more confident in the quality of mortgage lending decisions today relative to a few years ago,” he said.

ABS figures show that investor lending surged over the last six months of 2016. However, the latest housing finance figures released last week show that the value of investor finance actually fell by 1 per cent over December.

Mr Byres noted the pick-up in investor lending and said it was “not surprising”.

“With so much construction activity being completed and the resulting settlement of purchases, some pick-up in the rate of growth might be expected,” he said.

“But, at least for the time being, the benchmarks that we communicated – including the 10 per cent benchmark for annual growth in investor lending — remain in place and lenders that choose to operate beyond these benchmarks are under no illusions that supervisory intervention, probably in the form of higher capital requirements, is a possible consequence.

“If that is encouraging them to direct their competitive instincts elsewhere, then that’s probably a good thing for the system as a whole.”

In November, the International Monetary Fund (IMF) urged APRA to intensify its crackdown if investor lending continued to grow.

The IMF report said that with continued upside risk to house prices, APRA should “stand ready to intensify targeted prudential measures, if investor and other risky lending or house price growth were to re-accelerate.”

Meanwhile, Financial System Inquiry chair and former CBA boss David Murray believes investors are driving a “bubble” in the Australian housing market and says both APRA and the RBA must remain vigilant.

“All the signs of a bubble are there. Many of the signs are the same as the Dutch tulips – people’s behaviours, people’s defensiveness about any correction in the market. If the economy tracks okay it might turn out that this thing sorts itself out. But when those risks are there something needs to be done about it in a regulatory sense. The RBA and APRA need to stay on it,” Mr Murray said.

[Related: Household debt could lead to economic catastrophe]