Serviceability buffers tipped to rise in fresh APRA crackdown

In a research report on Commonwealth Bank of Australia (CBA) late last week, Morningstar analyst David Ellis explored the potential impact of further regulatory action on Australia’s largest mortgage provider.

“Increasing concerns of an overheating housing market are likely to prompt the Australian Prudential Regulation Authority, or APRA, to act to slow the rate of growth of residential investor home loans,” Mr Ellis warned.

“Likely action, known as macroprudential controls, include the reduction in the current 10 per cent annual growth limit on residential lending to something around 5 to 7 per cent,” he said.

Morningstar also warned that APRA could raise the minimum serviceability buffer “to 3 per cent from 2 per cent” and lift the risk-weighted capital floor for new residential investor borrowers holding multiple properties to 75-100 per cent.

The report noted that CBA applied the “higher rate” of 2.25 per cent above the current customer rate (or 7.25 per cent) for new mortgage applications to determine serviceability.

While APRA does not publicly disclose individual bank capital requirements, Mr Ellis said the regulator could impose tougher measures on individual banks if investor lending grows at levels considered “too risky”.

“Solid population growth, particularly in Sydney and Melbourne, good demand from foreign buyers, strong economic conditions in NSW and Victoria, historically low interest rates and attractive taxation rules continue to impact the overheated capital city housing market with demand exceeding supply,” he said.

“The strong appreciation in house and apartment prices, particularly in Sydney and Melbourne, has increased risks across the financial system with most focus on the major banks.”

Morningstar noted that a number of banks have steadily been increasing their variable home loan rates over the past six months, focusing on investor and interest-only loans.

“We expect further increases in investor home loan interest rates irrespective of any changes in the cash rate by the RBA,” Mr Ellis said.

On Friday ANZ became the latest of the big four banks to hike its home loan rates after NAB and Westpac a week earlier. Investors copped the biggest rate increases.

“We were surprised with the recent home loan interest rate increases announced by National Australia Bank and Westpac following shortly after the latest hearing of the Parliamentary Standing Committee,” Mr Ellis said.

“We expect tighter residential criteria for investor lending despite Commonwealth Bank recently reducing the maximum LVR for investor loans to 90 from 95 per cent,” he said.

[Related: 'Disgraceful': ASIC boss slams mortgage market]