Eyes on financial stability risk as house prices rise

Appearing before the House of Representatives standing committee on economics to review the Australian Prudential Regulation Authority (APRA) Annual Report 2020, APRA chair Wayne Byres said that according to the current trajectory, it seems likely that house prices would overtake income growth by “some margin”.

While committee member Labor MP Daniel Mulino noted APRA’s assertion that it would not target house price growth or housing affordability (reiterating similar assertions made in the past by the Reserve Bank of Australia), he asked Mr Byres what indicators APRA would follow to pull any lever on macro-prudential lending standards if APRA deemed it necessary in the future.

Mr Byres responded that APRA tracks various measures closely, including the level of interest-only lending, and the level of lending being channelled into the property investor market.

However, Mr Byres noted that in the current environment, both these areas have not been causes for concern for the prudential regulator as they have been at a relatively low level compared with the last cycle.

Mr Byres also addressed the rise in higher loan-to-value ratio (LVR) lending and debt-to-income measures (with recent CoreLogic analysis of APRA figures finding that the portion of new loans originated on a debt-to-income ratio of six or more comprised 17.2 per cent of mortgages originated in the December 2020 quarter, a series high).

Mr Byres said that the high LVR lending had risen marginally and attributed this to a “very high proportion of a very high share at present of lending to first home buyers”.

Explaining further, Mr Byres said: “They tend to on average borrow at higher LVRs. They obviously tend to be lower-income people often with a higher debt level.”

Mr Byres warned that it would be dangerous to adopt a “mechanical” approach to introducing lending measures and said instead that APRA would seek to apply a “fairly healthy overlay and judgement and experience” when implementing any macro-prudential regulations.

“I wouldn’t want to ever suggest that we have a trigger that says if this metric reaches X per cent or Y level, we would automatically spring into action because it’s not the way you’d do it,” he said.

“You need to overlay judgement. You’d need to consider what else is happening. You need to look at government policy responses, you’d need to look at state government tax responses.

“There’s a whole raft of things that you need to consider and so mechanical approaches are certainly not something we favour.”

Committee chair Tim Wilson asked whether APRA assesses whether the basis on which tightening macro-prudential regulatory standards could, in fact, make it more difficult for first home buyers to enter the property market or how it might “favour capital interests”.

Mr Byres said that this factor was taken into consideration during the previous cycle of changes in lending standards.

“One of the reasons that we chose not to follow many other jurisdictions around the world (for example, the UK and NZ) in LVR type limits was because it was most likely to impact first home buyers, and in the last cycle when we intervened, we didn’t see FHBs as the source of the problem,” Mr Byres said.

“We saw, as I said, strong investor growth and a very high proportion of interest-only lending where we thought the approximate causes of some of the concerns, we had around lending standards so that’s where we acted.

“We’re conscious that whatever we do has impacts on customers, and that has to be weighed up with the broader financial stability concerns.”

Loan deferral reduction a ‘good news story’

APRA also addressed the number of borrowers on loan repayment deferrals, with deputy chair John Lonsdale telling the committee that when APRA addressed the issue last year, around 10 per cent of lenders’ loan books was covered by deferrals.

Mr Lonsdale said APRA will release data this week for the end of February, which will show that the amount of loans on deferrals has reduced to about 0.5 per cent.

Speaking further about the decrease, Mr Lonsdale said: “It’s a very significant reduction in deferrals. We think that that’s a very good news story that the vast majority of the people on deferrals have moved on to fully loan payments paying their loans in the way that they were before.

“We think that that posed a significant risk, which we watched very closely last year but as it has progressed, we are very comfortable with how that has moved.”

Mr Lonsdale also said that the non-performing loans had remained at “very low” levels throughout 2020, and have continued to remain low.

However, he acknowledged that this scenario may change once government support measures are withdrawn.

“As economic situations change and government assistance is withdrawn, then that is something that we would watch very closely, including how the banks managed these loans and dealt with their customers,” Mr Lonsdale said.

“So, that it is an ongoing thing that we would examine and are examining.”

[Related: APRA clarifies its role under proposed credit reforms]

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.