The housing market is highly risky, according to chief banking regulator Wayne Byers, who has foreshadowed that individual banks and other lenders may have additional capital requirements imposed to curb their lending.
Mr Byers, chairman of the Australian Prudential Regulation Authority, told a parliamentary committee it was not possible to tell whether a market was a “bubble” before it was too late.
“But if you look at the conditions we are in at present, where we have very low interest rates, very high household debt, subdued income growth, rising unemployment, very high house prices and a very competitive financial market in terms of housing lending, there is a lot of potential for risk and risk is higher than it might otherwise be.”
However, Mr Byers said the fact that it is hard to be precise about the drivers of economic conditions meant that “inevitably, there’s a degree of caution about how (as a regulator) you jump into these issues”.
APRA wrote to the 160 banks and other lending institutions it regulates late last year to highlight areas of concern about housing lending, particularly rapid growth in investor loan portfolios, the risks to borrowers if interest rates rose, and loans that were too high relative to the value of the property or the income of the borrower.
Mr Byers said there are signs that the number of high loan-to-value loans is coming down and that is less of a concern.
However APRA has asked the approved deposit institutions (ADIs) to provide their lending plans for the year ahead and is currently going through them to ensure that they meet the regulator’s prudential requirements.
He said APRA would not be imposing higher capital requirements on investor loans across the whole industry, but would identify the individual institutions whose lending plans put them at particular risk.
“There are plenty of ADIs out there lending for housing who are using quite reasonable serviceability metrics, are not growing at particularly rapid rates and raise no obviouse cause of concern in their business practices and their growth aspirations. It would not be our intention to load any additional regulatory requirements on those institutions.”
Mr Byers said that, consistent with past practice, neither APRA nor the lending institutions would disclose whether the regulator had imposed additional capital requirements on their lending, saying it was important to preserve public confidence in the financial system.
This article first appeared in The Australian Business Review