An increase in Australian housing debt since 1997 and banks’ exposure to mortgages are a significant source of risk to the country’s financial system, according to a government inquiry.
Since a previous financial sector review, “household leverage has almost doubled,” the five-member panel led by David Murray said in an interim report released today. “Higher household indebtedness and the greater proportion of mortgages on bank balance sheets mean that an extreme event in the housing market would have significant implications for financial stability and economic growth.”
Australia’s average home price rose to a record in April and since a trough in May 2012 has climbed 15 percent, according to the RP Data-Rismark home value index. Household debt increased to around 1.5 years of income in 2008 from 0.8 years in 1997, according to the panel, which said it will seek more information on how to temper the effects of the housing market on the financial system and economy.
“The report sounds like it is paving the way for macroprudential tools given the rise in household debt,” said John Buonaccorsi, a Sydney-based analyst at CIMB Group Holdings Bhd. said by phone. The Australian Prudential Regulation Authority and central bank’s view is they “would need to see more valuation issues and lending going out of control” to employ such tools, he said.
The inquiry panel also asked for submissions on whether the bigger banks should set aside more capital against mortgages.
The Bank of England said last month lenders must limit the proportion of mortgages at 4.5 times a borrower’s income to no more than 15 percent of a bank’s new home loans. It also said lenders must decline mortgages to borrowers who fail a new repayment test. The Reserve Bank of New Zealand last year said loans for more than 80 percent of a property’s value must account for no more than 10 percent of new lending.
Tax rules for investment properties tend to encourage leveraged and speculative investment, the report said.
Australian investors can reduce their tax liabilities by deducting borrowing costs and other related expenses against total income at the individual’s full marginal tax rate. While similar tax treatment is available for other leveraged investments, such as equities, investors perceive housing as less risky and there is a falsely held view that house prices never fall, the report said.
Housing loans to investors represented 40 percent of all new mortgages in May compared with 35 percent two years earlier, according to the Australian Bureau of Statistics.
A sharp fall in house prices could push some households into negative equity, amplify financial distress and hurt the quality of bank balance sheets, the report said. The panel sought views on increasing the capital requirements for banks considered systematically important.
Australian mortgages are the largest asset class for the country’s four main banks and the biggest profit contributor. They represent 59 percent of loans for Commonwealth Bank of Australia, the largest lender by market value, 60 percent for Westpac Banking Corp. (WBC), the second-largest, 45 percent at National Australia Bank Ltd. (NAB) and 40 percent at Australia & New Zealand Banking Group Ltd., according to first-half filings from the lenders.
The four banks held A$1.06 trillion ($996 billion) in mortgages as of May, according to APRA.
The panel expects to make its final recommendations by November. The inquiry is the first since a government-appointed review of the financial sector headed by Stan Wallis, which reported in 1997. The Wallis inquiry resulted in the formation of APRA under a restructure of regulatory authorities.
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