Digital Finance Analytics (DFA) principal Martin North, who co-authored the recently released JP Morgan Australian Mortgage Industry Report, believes the regulators have not been tough enough on lending standards over the last 18 months.
“My own view is that the Reserve Bank and APRA have been very slow to come to the realisation as to how much risk is actually in the housing market,” he said. “I don’t think they have done enough. I think we have significant risks in the investor housing sector.”
Mr North’s comments come as APRA chairman Wayne Byres last week flagged “heightened risks” in the Australian housing market.
Addressing the Senate Economics Legislation Committee in Canberra last week, Mr Byres said the prudential regulator’s supervisory work on housing lending standards is ongoing, and that more may need to be done to avoid an erosion of existing lending standards.
“Given the environment of heightened risks, our objective has been to reinforce sound lending standards, particularly in relation to the manner in which lenders assess the capacity of borrowers to service their loans,” he said.
“Over the past year, we believe the industry has appreciably improved its lending standards. But risks within the housing and residential development markets remain elevated,” he said.
“We are therefore giving thought to how best to have improved standards firmly embedded into industry practice, such that they are not eroded away again over time.”
DFA’s Martin North questioned APRA’s 10 per cent speed limit and argued that better measures — such as those adopted by the UK mortgage market — could be more effective in mitigating risks.
“How the hell did they get 10 per cent? Why not 5 per cent or 3 per cent? My view is that using a volume growth measure to try and curb the risks is not a very powerful measure. I think they should be looking much more firmly at debt servicing ratios and loan-to-income ratios. Those are the measures from a macroprudential sense around the world that are being recognised as the most powerful and effective when it comes to controlling the risk in the market,” he said.
“I would recommend they look at what the UK has done, where they have very significant rules around loan-to-income.”
Mr North said that property investors still appear to be “bullish” about capital growth prospects and warned that poor quality loans written before APRA’s intervention are a concern.
“We have loans written over the last two or three years when lending standards were weak and those are still in the system,” he said. “We’ve got a historic problem added to the fact that underwriting standards, while better than they were, are not where they should be.”
A recent news story in The Australian reported that APRA has ordered the major banks to have their fraud systems externally reviewed amid concerns mortgages are being sold on flattering assumptions, including inflated incomes and undercooked living expenses.
Earlier this month a UBS report revealed that a third of Aussie mortgagors have admitted to providing factually inaccurate applications.