The banking regulator has tightened the rules governing the major banks’ property lending, ordering them to provide monthly growth reports for investor loans and flagging a range of restrictions if lenders failed to fall into line.
Revealing further insights into its crackdown on riskier lending, the Australian Prudential Regulation Authority pointed to a suite of “macroprudential” tools it could use to contain risks, such as some lenders failing to properly assess borrowers’ ability to repay under higher interest rates.
Notably, APRA’s submission to the parliamentary inquiry into home ownership pointed to New Zealand’s recent 70 per cent loan-to-value ratio cap on investment loans in Auckland, where house prices are up 60 per cent since 2008.
“To date, APRA has not seen it necessary to use these types of tools, and prefers to use supervisory interventions to shift regulated entities collectively toward better practice,” APRA said.
“Nevertheless, APRA has not ruled out using other tools, such as limits on particular types of higher-risk lending or more prescriptive serviceability parameters, if deemed warranted.”
APRA also noted that its impending changes to the major banks’ “risk weighting” of mortgages — expected this month — were “likely to have an impact on housing credit dynamics” by requiring more capital to be set aside for home loans.
While APRA forecast banks’ investment lending to slow, its reference to strict macroprudential tools highlights the regulator’s worries that the “guidelines” unveiled in December may need to be strengthened.
There is debate whether APRA’s efforts to slow investor lending is unduly hurting areas such as Perth and regional Australia that are not experiencing the investor-led boom as in Sydney, which the Treasury secretary recently said was in a bubble.
In December, APRA told banks they could be slapped with higher capital requirements unless lending to investors remained under 10 per cent a year. It also said banks should use an interest rate floor of 7 per cent in their serviceability tests, given rates would eventually rise from record lows.
While “too early” to assess the effectiveness of its actions, APRA said there remained “scope for improvement” in lending practises to safeguard the system amid hot competition.
It revealed that “a small number” of lenders were not applying any floor interest rate when assessing borrowers and others were using rates “well below” the long-term average.
Banks had also been extending interest-only periods to as long as 15 years, rather than the typical five years.
On the issue of home ownership, the Treasury urged state governments to reconsider levying stamp duty, which it labelled “one of the most distortive taxes in Australia’s economy”. In its submission to the parliamentary inquiry, the Treasury said state-based stamp duties drove a “wedge” between buyers and sellers, preventing “mutually beneficial transactions taking place”.
“Reducing stamp duties would improve land use, by facilitating households and business to move to land which best suits their circumstances,” the submission reads.
The Treasury submission remains mute on the impact of negative gearing, in contrast to the Reserve Bank, which “believes that there is a case for reviewing negative gearing, but not in isolation”.
Meanwhile UBS analysts yesterday forecast completions of apartments — which are popular with investors — would double in 2017 to 40,000, potentially leading to oversupply in Melbourne and Brisbane.
UBS said while “the housing cycle is now at the strongest on record”, the strong building activity contrasted with consumers’ negative view on whether it was a good time to buy. “This is a worrying contrast,” the analysts said.
On its 10 per cent investor lending cap, APRA said it had been challenging to consistently implement across the industry given banks’ various pipelines and starting points, but all lenders with material portfolios had agreed to operate at or below the threshold.
“Based on commitments ... APRA expects to see a slowing trend (in investor lending) for the second half of 2015,” APRA said. “The larger authorised deposit-taking institutions (ADIs) will be required to report monthly to APRA against planned investor loan growth, and APRA will be requiring an explanation for any deviations from commitments they have given. An ADI’s ongoing inability to manage lending growth in line with agreed targets may result in supervisors taking the view that a higher capital requirement is needed.”
For the year to May, National Australia Bank increased investor loans by 13.9 per cent, followed by Westpac’s 10.9 per cent, ANZ’s 10.6 per cent and Commonwealth Bank’s 9.4 per cent, according to APRA data.
But the banks have in recent months taken action to slow investor lending, including requiring larger deposits, chopping discounts and tightening serviceability.
In its submission to the housing inquiry, the Australian Bankers Association argued that high lending standards were being maintained, citing the fall in high loan-to-value lending, but also conceding that investors had increased interest-only lending since 2009.
The ABA called for a study on the impact of negative gearing on the housing market. “Public policymaking would be assisted by greater transparency and certainty on these issues,” the ABA said.
The most recent statistics, from 2013 show 1.2 million Australians own negatively geared property, with deductible losses of more than $12 billion. The ABA said the distribution of debt was “highly skewed” towards high-income investors.
This article first appeared in The Australian Business Review.