Chairman Wayne Byres said in a speech yesterday that “the current economic environment for housing lenders is characterised by heightened levels of risk”.
That is due to a combination of low interest rates, significant house price growth, high household debt, subdued income growth, rising unemployment and strong competitive pressures, he said.
“Many of these features have been emerging over a number of years, and APRA’s supervision has been intensifying in response,” he explained.
Mr Byres said that one of the challenges of evaluating how lenders assess the ability of borrowers to service loans is that many lenders are less conservative than they believe.
He pointed to a recent APRA study in which several larger lenders were asked to provide serviceability assessments for four hypothetical borrowers.
“The first surprising result from our review was the very wide range of loan amounts that, hypothetically, were offered to our borrowers,” he said.
“It was not uncommon to find the most generous ADI was prepared to lend in the order of 50 per cent more than the most conservative ADI.”
Mr Byres said the big gap was partly explained by the different approaches lenders took to measuring borrowers’ living expenses.
“Of major concern were a few ADIs who opted to make their credit assessment based on a lower level of living expenses than that declared by the borrower,” he said.
Lenders also took different approaches to inconsistent income sources such as overtime, bonuses and investment earnings, according to Mr Byres.
“Common sense would suggest it is prudent to apply a discount or haircut to these types of income, reflecting the fact they are often [a] less reliable means of meeting regular loan repayments. Unfortunately, common sense was sometimes absent,” he said.
Mr Byres stressed that although Australian lenders have avoided the subprime lending that caused problems overseas, some are engaging in “less-than-prudent” mortgage practices.
Australian lenders now devote almost 65 per cent of their loan portfolios to mortgages, compared to 55 per cent a decade ago, according to Mr Byres.
That explains why APRA is becoming increasingly vigilant about mortgage risks, Mr Byres said.
“ADIs that have continued to adopt sensible practices and prudent credit assessments should welcome this approach, as it strengthens their capacity to compete without being reckless,” he said.
“On the other hand, ADIs with more aggressive practices should fully expect to find APRA increasingly at their doorstep.”