Risky housing lending is worrying APRA, the financial stability regulator.
Housing markets are alive with transactions, auction clearance rates are rising, and many new first home buyers (FHB) are out looking to buy. They have been encouraged by the Federal Government's 5% deposit Home Guarantee Scheme.
That scheme guarantees lenders against a FHB default.
It is also a magnet for risky lending, a signal many promoters are drawn to. What's not to like? A 'put' that insulates the risk from the lender and shifts it to the taxpayer.
APRA is worried about how all this will play out.
Today, they have said they will limit high DTI home lending to "pre-emptively contain a build-up of housing-related vulnerabilities in the financial system."
It's a direct pushback against the political move to "help young aspiring homeowners" buy a house.
House prices are already very high, and affordability very low. Australia’s housing affordability has hit new lows over the past five years, with home values drifting even further out of reach and the share of income needed to pay a mortgage has nearly doubled, according to Cotality’s Housing Affordability Report.
"Everyone" agrees that something needs to be done to address the issue, but it is a supply issue, not a demand issue, and stoking demand with loan guarantees with very low deposit requirements just adds to demand, doing nothing for supply.
First home buyers buy based on the serviceability of their loan. They will buy at any price if they think they can make the payments. In the mad scramble to 'get a place', sound borrowing decisions can be ignored, and that can be encouraged by poor lending standards.
Even though it is early in the game, the low deposit guarantee has come into an already frothy real estate market, threatening to make matters much worse.
APRA is rushing to shore up the lending standards side of all this. Given that Canberra has unleashed this latest pressure, it is as much as APRA can do. It will have some impact, sure to generate stories about how some borrowers were denied home ownership by lenders now unwilling to breach the raised APRA standards.
Here is the APRA statement announcing the change:
The Australian Prudential Regulation Authority (APRA) will limit high debt-to-income (DTI) home lending to pre-emptively contain a build-up of housing-related vulnerabilities in the financial system.
While overall bank lending standards remain sound, APRA has observed a pick-up in some riskier forms of lending over recent months as interest rates have fallen, housing credit growth has picked up to above its longer-term average and housing prices have risen further.
Combined with a resilient labour market, these trends suggest a shift in the financial risk cycle and a potential build-up of vulnerabilities that could undermine banking sector and household financial resilience if left unchecked. In particular, high DTI lending has started to pick up, albeit from a low base, driven by high DTI loans to investors. This is expected to increase further in this part of the cycle, and already high household indebtedness could increase further.
Given these dynamics, APRA is acting now to contain the potential build-up of housing-related risks from high DTI lending by activating a DTI lending limit, with support from the Council of Financial Regulators.
From 1 February next year, the limit on home loans will allow authorised deposit-taking institutions (ADIs) to lend up to 20 per cent of their new mortgage lending at debt of six times income or more. The limit will apply separately to ADIs’ owner-occupier and investor lending.
At an aggregate level the limit is not currently binding, so it is not expected to have a near-term impact on borrowers’ access to credit. Only a small number of ADIs are expected to be near the limit for high DTI investor lending at this stage. Should levels of high DTI lending rise towards the 20 per cent limit over the coming period, this limit will act as a guardrail and is expected to have greater impact on investors, who typically borrow at higher DTI ratios than owner-occupiers.
Chair John Lonsdale said APRA is not prepared to wait for housing-related vulnerabilities to build up before acting.
“APRA’s macroprudential policy tools are designed to mitigate financial stability risks at a system-level. One of the key structural risks to system stability that APRA has long been concerned about is high household indebtedness. Rising indebtedness has in the past often been associated with an increase in riskier lending and rapid growth in property prices.
“At this point, the signs of a build-up in risks are chiefly concentrated in high DTI lending, especially to investors. By activating a DTI limit now, APRA aims to pre-emptively contain risks building up from this type of lending and strengthen banking and household sector resilience.
“While strong investor activity can amplify housing lending and price cycles that can impact financial stability, we are not yet seeing signs of the broad-based build-up of housing vulnerabilities including a deterioration in lending standards that we have seen in previous episodes of strong investor activity.
“Although broader risks are contained, we have seen in the past that they can build rapidly when interest rates are low or declining, borrowers extend themselves and competition among banks for new mortgage lending intensifies, which can lead to easing lending standards. We will consider additional limits, including investor-specific limits, if we see macro-financial risks significantly rising or a deterioration in lending standards,” Mr Lonsdale said.
APRA’s DTI limit excludes bridging loans for owner-occupiers and loans for the purchase or construction of new dwellings. This will enable the smooth functioning of property transactions and avoid constraining incentives for the supply of new housing. While the lending limit will apply to all ADIs, there will be some proportionate treatment for smaller ADIs.
APRA’s other active macroprudential policy tools, the mortgage serviceability buffer and counter-cyclical capital buffer, remain steady at three per cent and one per cent of risk-weighted assets, respectively.
The information paper outlining today’s decision and the accompanying letter are available on the APRA website:
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