Risky Australian Lending Targeted as RBA Spurs Housing: Economy

Australia’s banking regulator urged mortgage lenders to maintain standards as higher-risk borrowing rises and home prices surge amid record-low interest rates.

The Australian Prudential Regulation Authority is “seeing increasing evidence of lending with higher risk characteristics and it does not want this trend to continue,” Chairman John Laker said in a statement. Draft mortgage guidelines released today reinforce “the importance of maintaining prudent lending standards when competitive pressures may tempt otherwise.”

The Reserve Bank of Australia, which has held its cash rate at 2.5 percent since August, has signaled the housing upswing was needed to spur residential construction. The RBA has eschewed measures to curb booming prices, in contrast with New Zealand, which has introduced limits on low-deposit mortgage lending, and Bank of England Governor Mark Carney’s warning this month that surging U.K. home prices are the No. 1 economic risk and policy responses may result.

“The RBA needs house prices to keep rising because of the lift they provide to other areas including consumption and construction,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “Cooling prices now risks derailing the still fragile recovery. Evidence that lending standards have eased will force APRA to have more closed-door discussions with banks.”

The RBA examined a range of macro-prudential tools and favors closer supervision of lending over “tick-a-box” regulations to help deal with a property boom, according to papers released March 10 under a Freedom of Information Act request. The central bank sees loan tests that include buffers for higher interest rates as preferable, the papers showed.

Draft Guidelines

APRA’s draft guidelines released today state that banks should apply a buffer over a loan’s interest rate and regularly conduct stress tests with a range of scenarios to ensure their mortgage portfolios can withstand adverse economic conditions and changes to home prices. When brokers or other third-parties are involved, lenders should take responsibility to ensure borrowers can repay loans, according to the guidelines.

Boards should also be vigilant if a bank increases home loan lending faster than competitors, or in particular segments or geographies, APRA said.

“This guideline doesn’t move APRA down the road of macro-prudential policies to address rising home prices,” John Buonaccorsi, Sydney-based banking analyst at CIMB Group Holdings Bhd., said by phone. “APRA is more concerned about underwriting standards and debt serviceability rather than just loan-to-value ratios and other limits.”

Stress Tests

Australia’s four biggest banks -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. -- had A$1.04 trillion ($960 billion) worth of mortgages as of March 31, according to APRA data.

Australian house and apartment prices climbed 11.5 percent in April from a year earlier with Sydney leading gains at 16.7 percent, according to the RP Data-Rismark home value index.

The RBA said March 26 an upswing in property prices has the potential to encourage speculation, it can’t go on forever, and lenders should avoid relaxing standards to boost profits.

The mean home price across Australia’s eight major cities rose to a record A$637,965 in April, according to RP Data. The average owner-occupied home loan size across Australia climbed 6 percent to A$319,300 in March from a year earlier, according to the nation’s statistics bureau.

Interest Only

Interest-only mortgages rose to 39 percent of total loans approved in the last three months of 2013 from 35 percent a year earlier, according to APRA data released on Feb. 25.

Banks should only approve such loans for owner-occupiers where there is a sound economic basis and not because the customer can’t qualify for a traditional loan where the principal is also repaid, APRA cautioned today.

Under the Reserve Bank of New Zealand’s lending limits introduced on Oct. 1, loans for more than 80 percent of a property’s value must account for no more than 10 percent of a bank’s new lending, down from about 30 percent.

The Bank of England said this month its options include imposing more checks on the affordability of mortgages, limiting types of loans or advising the government to rein in its stimulus program.

“We don’t see much value in carving out a particular aspect of the prudential framework under separate governance and manipulating it separately,” Luci Ellis, the head of financial stability at the RBA, said this month. “We’re talking about leaning on serviceability and making sure serviceability is being tightly controlled.”

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