The banking regulator has weighed into renewed fears that the nation’s housing “bubble” is about to burst, claiming the $4.6 trillion banking system is better placed than other nations to handle any shocks.
In his most detailed comments this year on housing, which makes up two-thirds of bank lending, Australian Prudential Regulation Authority chairman Wayne Byres said the market was most vulnerable to a rise in unemployment and borrowers with small deposits, or high loan-to-value ratios.
He said APRA continuously scrutinised banks’ lending at high LVRs — usually considered to be above 80 per cent — to ensure there was “enough margin for error in there that it’s not necessarily fatal to anybody if there is a downturn in the market”.
“If we had some kind of shock … the key here is not that prices go down because in and of itself if people can continue to service their loans history tells us Australians will do that,” he told a House of Representatives economics committee yesterday.
“The key shock will be around if there was something that led to a significant increase in unemployment that would jeopardise people’s ability to service their loan. (And) banks have to resort to selling the properties to have the loan repaid, then it is the ones with a high LVR ratio which will inevitably be the source of the greatest losses.”
Amid a public fracas about negative gearing after Labor vowed to make changes if elected, Mr Byres said that while the “basic rule of economics” suggested reduced demand lowered prices, this was not always the case and was far too simplistic.
“Any change to policy will have an impact,” he said. “(But) it’s very difficult to work out what the impact will be.”
While property has long been viewed as the banks’ — and the economy’s — Achilles heel, concerns recently flared after a US research house claimed Australia had “one of the biggest housing bubbles in history” and prices would fall 80 per cent in mining towns and 50 per cent in parts of Sydney and Melbourne.
Mr Byres said while a slump in prices could not be ruled out, the banks’ “hardship mechanisms” would prevent “everyone being kicked out on the street immediately” when payments were missed.
“That is probably the most important thing because if you look at what happened in the US experience in the subprime crisis ... customers can just hand back the keys and walk away from their debts,” he said.
“That’s not something an Australian borrower can do.
“That fire sale of properties (in the US) was the most damaging thing to household values because you had this flood of properties for sale in a very short period of time.
“But I think there are differences in the way our market operates that mean the damaging impact of a fire sale of lots of properties from distressed borrowers wouldn’t happen here in the same way it happened in other jurisdictions.”
As the housing boom gathered pace in recent years and bank lending standards slipped, APRA worked with the Reserve Bank to tighten policies and slow riskier loan growth, such as to property investors.
The efforts helped cool parts of the market, particularly in mining areas, and Mr Byres defended APRA’s actions, arguing promoting sensible lending was needed in frothy and slow growth periods.
APRA this week revealed that bank lending standards had improved and it would now also probe whether parties were skirting banks’ tighter policies.
In a speech in Sydney, Luci Ellis, the RBA’s head of financial stability, said so-called booms never “last forever” and she was actually “not too worried” if people were talking about a bubble.
“If it gives a few other people pause and makes them open their eyes to the real risks, it is not such a bad thing. I would rather that, than if everyone were egging the boom on,” Ms Ellis said yesterday.
She said the best way to avoid problems was not being overly leveraged by adding more capital, including banks that had “profited from the risk-taking on the way up”.
The Australian