Analysis: Is APRA about to curb lending again?

The RBA and APRA work closely when it comes to matters of financial stability. Particularly when bank lending is involved. The RBA has historically made judgements about the Australian economy, the housing market, or any potential risks in the system, which are followed up by APRA — either in private conversations with banks or, as was the case in 2014, in well-publicised measures.

A closer look at the RBA’s Financial Stability Reviews and the subsequent announcements from APRA provide a decent reading of how measures such as lending curbs reach the market.

Take the RBA’s September 2014 Review. The key phrase came when the central bank warned that “the composition of housing and mortgage markets is becoming unbalanced”.

“This has been most evident in the current strength of investor activity in the housing market, and in its concentration in Sydney and Melbourne,” it said.

“The apparent increase in the use of interest-only loans by both owner occupiers and investors might also be consistent with increasingly speculative motives behind current housing demand.”

Less than three months later, in December 2014, APRA came out with its “three-point plan” to target high LVR loans, lending to property investors and interest-only loans.

The latest Financial Stability Review from the RBA, released last month, warned that the foreshadowed risk of oversupply in some apartment markets is nearing and could see off-the-plan purchases fail to settle, particularly in Brisbane, Melbourne and Perth.

But the biggest indicator that more lending curbs could be on the horizon came from APRA chairman Wayne Byres, shortly after the release of the RBA Review.

Addressing the Senate economics legislation committee in Canberra on October 20, Mr Byres said APRA’s supervisory work on housing lending standards is ongoing, and that more may need to be done to avoid an erosion of existing lending standards.

“Given the environment of heightened risks, our objective has been to reinforce sound lending standards, particularly in relation to the manner in which lenders assess the capacity of borrowers to service their loans,” Mr Byres said.

“Over the past year, we believe the industry has appreciably improved its lending standards. But risks within the housing and residential development markets remain elevated,” he said.

“We are therefore giving thought to how best to have improved standards firmly embedded into industry practice, such that they are not eroded away again over time.”

A few days after this speech, APRA announced that it would be requesting more mortgage data from banks and tweaked its mortgage lending guidance, particularly around serviceability requirements.

Some industry professionals believe APRA has done more than enough intervention. Others, like Digital Finance Analytics principal Martin North, argue that more needs to be done.

“My own view is that the Reserve Bank and APRA have been very slow to come to the realisation as to how much risk is actually in the housing market,” he said.

“I don’t think they have done enough. I think we have significant risks in the investor housing sector.”

“I think they should be looking much more firmly at debt servicing ratios and loan-to-income ratios. Those are the measures from a macroprudential sense around the world that are being recognised as the most powerful and effective when it comes to controlling the risk in the market,” he said.

“I would recommend they look at what the UK has done, where they have very significant rules around loan-to-income.”

APRA’s supervision of mortgage lending is ongoing. Given the regulator’s recent public announcement about “heightened risks”, it would be fair to consider that further curbs could be on the horizon. However, any bold moves from APRA towards the banks are unlikely to be as publicised as the lending curbs we have seen so far.

It is more likely banks will be privately pulled aside or tapped on the shoulder should their lending standards start to slip.

[Related: APRA likely to ‘tighten the screws’ further]