In response to misinterpretations of the Australian Prudential Regulation Authority’s (APRA) statistics on authorised deposit-taking institutions (ADIs), the prudential regulator has clarified that the average balance of mortgages is not necessarily indicative of the level of indebtedness of households.
It noted that housing loan approvals decreased in the year to March 2019, but the average loan size has increased.
APRA’s quarterly ADI property exposures (QPEX) showed that owner-occupied housing approvals declined by 7.2 per cent year-on-year (YoY) in the 12 months to 31 March 2019, while investment loan approvals decreased by 14.9 per cent YoY.
However, the average loan size continued to grow from 2014 to 2019, edging closer to $300,000 (from around $250,000 in 2014).
Further, it pointed out that the increase in the number of housing loans has been misconstrued as representing an increase in the number of borrowers with a mortgage.
“Since the last QPEX (December 2018) was published, some commentators have misinterpreted APRA’s data in their analysis of the average balance of housing loans. They have assumed that an increase in the number of housing loans meant an increase in the number of borrowers with a housing loan,” the prudential regulator stated.
“This misinterpretation has resulted in a suggestion that the average balance of housing loans represents the level of indebtedness of Australian households.
“This conclusion cannot be drawn from the data.”
APRA noted that the QPEX publication provides statistics from the ADI’s perspective – such as the value of loans and the number of loan accounts in an ADI’s portfolio – rather than from the borrower’s perspective.
“The data is a simple average calculated as the total balance of all housing loans divided by the total number of housing loans extended by ADIs,” the regulator said.
APRA further pointed out that borrowers may have multiple housing loans, meaning that the average balance of housing loans cannot be used to determine the average debt of every borrower.
“When APRA supervises an ADI, we do not consider the average loan size to be a reliable indicator of risk; rather the data is just one of many inputs to identify potential changes to the overall structure and size of loans,” the prudential regulator added.
“When a borrower applies for a housing loan, APRA requires the ADI to assess the borrower’s ability to repay the loan, taking into account the borrower’s other debt commitments and everyday expenses.”
The regulator in July announced that it would include data on most credit unions and building societies in its monthly ADI statistics publication, noting that the change follows the implementation of the new Economic and Financial Statistics (EFS) data collection from 1 April 2019, which was intended to improve data on key business metrics for ADIs and larger non-ADI lenders.
APRA also in July called out banks – such as Macquarie Bank, Rabobank Australia and HSBC Bank Australia – for breaching the regulator’s standards for the reporting of intra-group funding arrangements.
The regulator explained at the time that the banks were “improperly reporting” the stability of the funding they received from other entities within their respective groups, adding that the lenders had provisions in their funding agreements that would potentially allow the group funding to be withdrawn in a stress scenario, which it said undermined their stability.
This month, it made amendments to its prudential standard (APS 222) aimed at “mitigating contagion risk within banking groups”, including a broader definition of related entities that includes board directors and substantial shareholders, revised limits on the extent to which ADIs can be exposed to related entities, minimum requirements for ADIs to assess contagion risk, and removing the eligibility of ADIs’ overseas subsidiaries to be regulated under APRA’s Extended Licensed Entity framework
Tas Bindi is the features editor on the mortgage titles and writes about the mortgage industry, macroeconomics, fintech, financial regulation, and market trends.
Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business.