One of the big four banks has said that it will be “more cautious” on lending, after raising concerns over the longevity of strong house price growth and rising underemployment.
The chief executive officer of Australia and New Zealand Banking Group Limited (ANZ), Shayne Elliott, has suggested that the big four bank would want to hold its share of the mortgage market (currently 15.5 per cent) or even “give up a little of market share”, due to rising risks in the market.
Speaking after releasing the bank’s financial statement for the year ending September 2016 last week, Mr Elliott said: “With strong house price growth, there's always the risk that that could reverse.
“Now, we're not sitting here suggesting that, and it's not our core case that we think that house prices are going to fall, I'm not suggesting that for a minute. But … when you are lending 80 per cent or 90 per cent of the value of a new home — and when you're seeing such volatility in prices (we've been used to them going up at double digit) — it doesn't take a lot for them to construct a scenario where they go down at double digit.
“[So], if you've lent 90 per cent of the value, [then] very, very quickly you can end up under water ... So we're a bit more cautious, [we’ve] got to be really careful about that.”
The bank chief’s comments are timely, as they follow on from warnings from ratings agency Standard & Poor’s, which suggest that if the strong growth in private sector debt and residential property prices continue to build, they would “increase the risks that a sharp correction in property prices could occur” meaning that credit losses incurred by all financial institutions operating in Australia would be “significantly greater”.
Indeed, S&P said it is revising its rating outlooks on 25 financial institutions in Australia to negative, as it now sees a 1 in 3 chance that it would lower these ratings in the next two years. Outlooks on three Australian banks have also been revised from ‘positive’ to ‘developing’ for the same reason.
Underemployment exacerbating risk
As well as property price concerns, Mr Elliott also suggested that the bank is apprehensive over ‘underemployment’ (where workers are employed part-time rather than full-time or are doing jobs that they are over qualified for).
He said: “What we're seeing in Australia … [is that] more and more Australians are not working to the full capacity that they would like to, so they're doing less hours.
“Secondly, there's been a big transition where people were in higher paying jobs — maybe because of overtime, maybe they were in the mining sector — are now in lower paid jobs. So, their household income is either stagnant, flat, or it's falling. That means that it's a little bit harder for them to keep up with their mortgage payment or whatever payments and commitments they have.
“So, we're just saying, in that environment, let's just be really cautious about who we're lending to. We just don't think it's the right time to be out on the front foot too aggressively.
“[W]e're still in the market, we still want to grow … and we want to lend, we want to help people into their homes. But we just want to be a little bit more cautious than we've been in the past … if that means we give up a little bit of market share, that's okay.”
As well as affecting the mortgage market, underemployment could also affect ANZ’s insurance business, according to Mr Elliott.
He explained that claims costs for the life insurance business are rising due to increased claims on disability and an increase in lapse rates, “which is people who have taken out insurance who no longer pay the premiums”.
“I think the lapse rate piece is really behavioural and reflects the fact that there's stress in a lot of households in Australia,” he said.
“One of the things, when you're under a bit of stress, that you might not be able to continue to afford is life insurance. So, it becomes a little bit of a luxury in people's eyes and they cut it back and that's certainly having an impact in the industry.”
ANZ to focus its mortgage efforts in NSW
However, Mr Elliott said that although “in general [the bank is] cautious about the market”, ANZ will be focusing its growth efforts in NSW.
Conceding that the housing market in NSW has “probably accelerated the most” (for example, the median house price in Sydney is now over $1.05 million), household income in the state is still strong.
He said: “While house prices have done very well here, actually NSW as an economy performs really, really well. It's more likely that people here are fully employed and that the household incomes are actually rising, so it's a little bit of a balance between those two.”
Mr Elliott added that the bank’s market share in NSW has “always historically been quite low” (it’s key mortgage market in Australia is Victoria), “so we do want to grow our business here responsibly and we're doing that by opening more branches, having more people etc. So, it's just getting that balance right.”
The bank CEO added: “Largely, we're talking about in Sydney — we're talking about owner occupied homes, [and] the average mortgage being written is in the $400,000 range.
“We're not talking about trying to build a business with million dollar mortgages. We're talking about mums and dads, first home buyers – [it’s] that $400,000 to $500,000 mortgage [market] where we're operating and wanting to win.”
[Related: Major bank looking at tracker mortgages]