While “credit positive” for banks, it “remains to be seen” how effective APRA and ASIC’s latest measures will be in moderating house price appreciation, according to the ratings agency.
Daniel Yu, Moody’s vice president and senior analyst, says the effect of APRA and ASIC’s latest regulatory measures will be “credit positive” for the nation’s banks as they will “curb the growth in riskier mortgage loans against the current backdrop of rising house prices and high household indebtedness”.
Mr Yu’s comments come after APRA recently introduced measures to limit the flow of new interest-only mortgages from banks to 30 per cent of total new residential mortgage lending.
The regulator also provided instructions to the banks to ensure that growth in housing investment mortgages remains “comfortably” below the 10 per cent limit introduced in December 2014, which Moody’s says “has not been a hard target until now”.
Indeed, APRA has advised the banks that there will not be any tolerance for exceeding the growth speed limit and that any breach will prompt a review of the offending bank’s capital requirements.
Mr Yu said that the banks’ response of raising interest rates on interest-only loans to reduce growth in this segment is “a further credit positive” for them as it “supports their net interest margin from ongoing price competition for lower-risk loans and stable deposits”.
Further, Mr Yu believes the measures will do well to “strengthen mortgage underwriting” and add a layer of protection for the banks, residential mortgage-backed securities and covered bonds in the event of a house price correction.
However, he said that it remains to be seen how effective the measures will be in moderating house price appreciation, particularly when low interest rates continue to support housing demand.
"In summary, while the latest measures and interest rate increases by the banks on interest-only loans will have some impact on demand for housing, we continue to expect upward pressure on house prices in Australia in an environment of low interest rates," he explained.
“Furthermore, although low interest rates will also continue to support the capability of borrowers to service their debt, we view rising house prices, in combination with high household leverage and low wage growth, as increasing tail risks for the Australian government, banks and RMBS,” he added.
Mr Yu stressed that at more than 120 per cent of GDP, Australia’s household debt is “substantially higher” than in most other advanced countries and has risen markedly in recent years.
The governor of the Reserve Bank recently flagged that Australian households are carrying more debt than they have before, which is a “significant issue” that the central bank is “watching carefully”.
Speaking at the Australia-Canada Leadership Forum, RBA governor Philip Lowe explained that an increase in housing prices has gone “hand-in-hand” with a further pick-up in household indebtedness.
“In aggregate, households are carrying more debt than they have before and, at the same time, they are experiencing slower growth in their nominal incomes than they have for some decades. For many, this is a sobering combination,” he said.
Similarly, Fiona Guthrie, the CEO of Financial Counselling Australia, told the PM radio program in February that household debt — which now sits well over $1 trillion — was at all-time high in Australia and could have serious ramifications on the economy in future.
Ms Guthrie claimed that 30 per cent of Australian households are in some sort of financial stress.
“Because we have so much debt and it’s at such high levels the least little wind is going to tip us into something that could look very like a catastrophe,” she said.
As a result, Mr Yu said that the housing market remains a risk to economic growth, given that highly leveraged households are most likely to cut back on spending in the event of an economic downturn.
“If successful, these new measures will support financial stability, which is in turn supportive of Australia's sovereign credit profile,” he concluded.
On the other hand, CoreLogic executive general manager banking and finance Craig MacKenzie emphasised that APRA has made it clear that its role is not to regulate house prices.
“Its role is to promote prudential safety and fairness of regulated institutions and prudent lending standards, having regard to the environment in which those regulated institutions are operating,” he explained to Mortgage Business.
“When you look at the current environment of very strong house price growth, particularly in Sydney and Melbourne, consumer indebtedness reaching close to record levels, and the composition of the lending activity that is taking place, I think when you combine those elements, the risks are certainly heightened at the moment hence the current focus.
“This is a heightened risk environment, given those elements that are present and therefore that's when APRA's vigilance and engagement with regulated institutions increases.”