Prolonged rise in riskier loans could spur intervention

CoreLogic’s head of research Australia, Eliza Owen, noted that while recent data suggested a slight increase in the proportion of “higher risk” loan originations through the December quarter, the regulator did not currently see evidence of a “material relaxation in lending standards”.

However, she added that this could change if the increases continue.

The comments were made in Ms Owen’s analysis of data recently released by the Australian Prudential Regulation Authority’s (APRA) on the performance of banks, and banks’ property exposures, for the period ending December 2020. 

Indeed, while Ms Owen recognised that APRA’s December quarter statistics showed a trend towards “riskier” styles of lending, she said that “the magnitude is not likely to be large enough to trigger a regulatory response”.

However, she warned that “if this trend continues, or indeed accelerates, it becomes more likely we will see a regulatory intervention aimed at curbing financial stability risks related to the housing sector”.

Ms Owen also outlined that despite the property market heating up with rapidly rising home values across Australia, the APRA data has indicated that there is no “blowout” of risk in mortgage lending.

According to APRA’s Quarterly Authorised Deposit-taking Institution Property Exposures publications for the period ending December 2020, new residential mortgage lending increased by 13.1 per cent over the quarter to total $128.1 billion in the December 2020 quarter, and increased by 20.2 per cent compared with the same quarter last year.

APRA said this quarterly increase was driven by owner-occupied and investment lending growing by 13.7 per cent and 12.4 per cent, respectively.

It attributed this to favourable borrowing conditions, including record-low interest rates and government initiatives such as the HomeBuilder scheme and the First Home Loan Deposit Scheme (FHLDS).

However, the prudential regulator added that “according to the available indicators, there is no evidence to suggest a material relaxation in lending standards is accompanying the significant increase in new lending”.

Meanwhile, the data also showed that the value of new interest-only loans funded jumped significantly on the previous year from $18.7 billion in the December 2019 quarter to $24.6 billion in the December 2020 quarter.

Ms Owen’s analysis of the interest-only loan data found that the portion of new mortgages lent on interest-only loan terms hit 19.2 per cent in the December 2020 quarter, up from 18.5 per cent in the previous quarter. However, she noted that this is only a slightly increase from the 18.7 per cent average seen over the past two years.

“It is also well below the record high of 45.6 per cent, which was recorded over the June 2015 quarter. However, it is worth noting there have been improvements to collection of banking statistics, and the historic series is not directly comparable with recent data,” she said.

LTI, DTI of six or more at series high

Ms Owen’s analysis of APRA’s figures also showed that the portion of new home loans originated on a loan-to-income ratio of greater than or equal to six times reached its highest level across the series (which commenced from March 2019).

It was at 7.0 per cent of loans over the December 2020 quarter.

She also said that loans originated with a debt-to-income ratio of six or more made up 17.2 per cent of mortgages originated in the quarter, which she said was also a series high.

However, she also said: “APRA did not express concern around this metric in their report, arguing the share of debt-to-income lending was ‘within its historical average’.

“Increased demand across Sydney and Melbourne property markets, as is being seen at the moment, will test debt-to-income ratios.

“This is because the house price-to-income ratio across Sydney has averaged around 8.5 since 2013, and has averaged 7.5 across Melbourne since 2015. As housing prices rise at a time when incomes are expected to remain relatively flat, there is the potential for both loan-to-income and debt-to-income ratios to lift further, which is likely to be seen as a riskier outcome by regulators.”

APRA data showed that the portion of new homes originated on a loan-to-value ratio (LVR) of 80 per cent or more increased from 39.9 per cent in the previous quarter to 42.0 per cent across all borrowers in the December 2020 quarter, which Ms Owen said was the highest proportion on record.

She added that there was a greater increase in the owner-occupier space, where 45.7 per cent of loans were originated on an LVR greater than or equal to 80 per cent, and 14.1 per cent of loans were greater than or equal 90 per cent.

“The regulator argued this increase reflects greater participation of owner-occupiers in the market, particularly first home buyers,” Ms Owen said.

“First home buyers may be accessing housing through loan guarantors, or even the First Home Loan Deposit Scheme, which reduced the risk of low-deposit home loans.”

Ms Owen concluded by suggesting that a deterioration in lending standards could be avoided by tightening serviceability assessment rates, loan sizes relative to incomes or debt, or loan sizes relative to home valuations.

Reserve Bank of Australia (RBA) governor Philip Lowe recently told the AFR Business Summit that while the RBA is paying close attention to lending standards, the situation has not reached a point that would warrant action from the Council of Financial Regulators around lending standards.

[Related: RBA focused on lending, not house prices: Lowe]