The International Monetary Fund has thrown its support behind the banking regulator’s crackdown on lending to property investors, arguing measures may need to be “intensified” unless the housing market cools quickly.
In a broad report, the IMF warned house prices were “probably” overvalued by about 10 per cent, with the problem concentrated in Sydney and “fuelled by investor credit and interest-only loans”.
Similar concerns in recent years led the Australian Prudential Regulation Authority to crank up supervision as lending standards declined amid hot competition and low interest rates. In December, APRA told banks to cap lending growth to investors at 10 per cent or risk being punished with higher capital requirements.
This week, the Reserve Bank’s monthly credit data said lending to property investors edged lower in August to 10.7 per cent across the past year. Several banks, including some of the big four, are also individually breaching the cap.
“If investor lending and house- price inflation do not slow appreciably in the second half of the year these policies may need to be intensified,” the IMF said.
It said APRA could impose higher risk weights for investor and interest-only lending, perhaps geographically targeted.
The regulator could also install a maximum interest-only period for interest-only loans or address tax incentives that “give rise to the high degree of household and bank exposure to housing”.
Yesterday, CoreLogic RP Data figures showed the Sydney market continued to slow. Average Sydney home values grew 0.1 per cent over the month to $785,000.
The average Melbourne home was valued at $580,000, up 2.4 per cent. Hobart and Adelaide recorded falls of 1.9 per cent and 1.2 per cent respectively.
CommSec economist Savanth Sebastian said September figures showed prices were “starting to look healthier with the gains more widespread across the states”.
“In the Sydney housing market, there are signs that price growth will be more circumspect,” he said.
“The tighter lending policies being adopted by the banks coupled with new housing supply should ensure much more sedate property price growth.”
Noting the banks’ heavy exposure to housing was a vulnerability, the IMF also backed the Murray financial system inquiry’s recommendation to make banks “unquestionably strong”, noting “significantly higher capital would be needed in a severe adverse scenario to ensure a fully functioning system”.
APRA has already acted on the inquiry’s call to increase capital in the major banks’ mortgage books through higher risk weights from July next year. But the IMF said capital ratios had to be increased substantially to ensure the strength of the banks.
The banks have resisted the call to increase capital levels further, arguing they are already in the “top quartile” globally and it could result in higher borrowing costs and lower returns to shareholders.
APRA and the Murray inquiry disagreed, saying the major banks’ capital levels were not in the top quartile.
The Customer Owned Banking Association, which represents mutuals, welcomed the report: “The IMF makes it clear that there is no room for complacency in relation to major bank capital.”
This article first appeared in The Australian Business Review.