Australia in No Rush to Cool Housing Market Amid Mortgage RisksNarayanan Somasundaram
Australia is still working on possible tools to strengthen mortgage-lending practices and cool an unbalanced housing market, the chairman of the nation’s banking regulator said today.
The Australian Prudential Regulation Authority is looking at the ability of borrowers to repay in a rising interest-rate environment, interest-only loans and “extremely” long tenure mortgages, Wayne Byres said. The supervisor is also examining an increase in landlord housing loans and the potential need to raise bank capital requirements if risks rise, he said. While regulators would like to unveil measures before the end of this year, there wasn’t a deadline, Byres said.
“I’d much rather make the right decision than just adhere to an internally imposed deadline,” Byres said at a parliamentary committee hearing today in Canberra. “I don’t want to get rushed into doing something then find that it’s actually not the right thing to do and unwind things.”
The measures are meant to temper speculative buying, which is creating a housing market that the central bank has called “unbalanced.” Outstanding mortgages to investors and interest-only loans climbed to a record in the September quarter, APRA data show. House prices across the country’s capital cities soared 8.9 percent in the year through October, according to data provider CoreLogic Inc.
Given housing’s importance to the health of the banking system, APRA has been encouraging lenders to reinforce sound lending standards, as well as discussing possible measures with other Australian authorities, he said.
The Reserve Bank of Australia, whose decision to keep its benchmark cash target at a record low of 2.5 percent since August 2013, said in September that it was in discussion with other regulators about possible measures to strengthen lending practices. Governor Glenn Stevens said that he was open to using such measures even while expressing “certain skepticism about macroprudential tools as a panacea.”
APRA was unlikely to start with loan-to-value ratio limits or loan-to-income limits that have been adopted by some overseas regulators, Byres said.
The Bank of England in June said mortgages at 4.5 times income cannot make up more than 15 percent of a lender’s new home loans and also required banks to decline loans to those who fail a new repayment test. New Zealand in October last year imposed limits on the number of mortgages with a loan-to-value ratio of more than 80 percent.
Canada has been tightening macro-prudential policy since 2008, with steps including minimum down-payment demands and maximum debt limits for insured mortgages. Sweden and Norway capped loans as a share of a property’s value and asked banks to protect themselves against losses. Hong Kong limited the size of loans too and took steps to curb some purchases by foreigners.
If APRA were to reach a conclusion that risk is rising within the financial system, then it would be appropriate to think about how to adjust capital settings in response, Byres told lawmakers. Such adjustments could be made either across the board or to individual banks, he said.
Australia has the world’s most overvalued housing market on a price-to-income basis after Belgium, according to the International Monetary Fund. Residential mortgages make up 60 percent of the banking system’s domestic loan portfolio, which is high by historical and international standards, APRA said in its 2014 annual report.
Housing credit climbed by 7 percent in the 12 months through October, the fastest pace since January 2011, according to RBA data released today.
Macroprudential measures would help absorb the pressures of house price strength and reduce the potential risk to the stability of Australia’s financial system, ratings agency Standard & Poor’s said yesterday.
Housing “has traditionally been the source of stability that has enabled banks to keep the ship upright and sail forward,” Byres said. “ Our objective is to make sure that remains the case. To make sure those portfolios are a source of stability rather than a source of risk.”