APRA writes to lenders on home loan risks

The Council of Financial Regulators (CFR) has released its quarterly statement after holding its quarterly meeting on 11 June, where they discussed housing market risks, lending standards and the regulatory arrangements for property e-conveyancing.

The CFR – which includes the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury, and the Reserve Bank of Australia (RBA) – said that council members “reiterated” the need for lending standards to remain sound amid record-low interest rates and rising house prices.

It said that overall lending standards in Australia have remained sound, but noted that there have been signs of some increased risk-taking recently.

The CFR said: “APRA has written to the largest authorised deposit-taking institutions (ADIs) to seek assurances that they are proactively managing risks within their housing loan portfolios, and will maintain a strong focus on lending standards and lenders’ risk appetites.”

The RBA recently cautioned lenders and the financial sector against “excessive risk-taking” amid rising asset prices, including looser lending standards for loans. It warned that in the current environment of accommodative financial conditions and rising asset prices (including rising property prices), it is particularly important that the financial sector does not engage in “excessive risk-taking”.

CFR keeps eye on debt v income

Members of the CFR also stressed that they are looking at potential policy options to address the risks that could stem from household borrowing “substantially” outpacing household income growth.

Council members have underscored that they are paying close attention to the implications of trends in household debt.

Analysis by Moody’s Investors Service revealed earlier this year that Australia’s household debt totalled 121.4 per cent of GDP in the second quarter of 2020, higher than other AAA-rated commodity-exporting sovereigns such as New Zealand, Canada and Norway.

Furthermore, Australia’s ratio of household debt to disposable income has also remained at significantly high levels, at 179.9 per cent as of September 2020, the analysis showed.

According to the Australian Bureau of Statistics’ (ABS) Australian National Accounts Finance and Wealth data for December 2020, the housing debt-to-income ratio decreased from 139.2 to 139.0 over the quarter as growth in income (1.2 per cent) exceeded housing debt (1.0 per cent).

The ABS attributed the growth to government income support packages implemented in response to the coronavirus pandemic, including the JobKeeper package and the Coronavirus Supplement.

CFR members also discussed developments in household borrowing and the housing market amid rising house prices. It said that housing credit growth has picked up, with further increases expected over the months ahead.

“Over the past few years, owner-occupiers have accounted for most of the increase in household borrowing,” the CFR said.

“The demand for credit by investors has been subdued but is now increasing. Housing markets are strong across Australia.”

Recent APRA figures showed that while owner-occupied lending across ADIs grew over April by 0.6 per cent ($6.9 billion), the rate of growth slowed from 0.7 per cent ($8.3 billion) in March.

On the other hand, investment lending increased by $2.1 billion or 0.3 per cent in April, marking an increase from the March growth rate of 0.2 per cent ($1.6 billion).

Amid record-low interest rates, government incentives such as the HomeBuilder scheme and the First Home Loan Deposit Scheme (FHLDS), increased buyer demand and reduced property stock, recent data from the ABS showed that the total value of residential dwellings rose by record numbers in the March 2021 quarter, up $449.9 billion, and surpassing a total of $8 trillion for the first time to almost $8.3 trillion.

In NSW, the average price of residential dwellings broke through the $1-million mark (the first time that the average dwelling price had surpassed $1 million in any state or territory), rising to $1.01 million.

CoreLogic’s Daily Home Value Index revealed that home values across the combined five capital cities rose by 10.9 per cent over the year to date, 10.2 per cent over the last 12 months, while there was a monthly rise of 1.9 per cent and a weekly rise of 0.5 per cent in values.

Research from the Real Estate Institute of Australia found that property prices in capital cities have grown at the fastest rate in a decade, with median prices for houses up 6.8 per cent over the March quarter, while other dwellings rose by 2.7 per cent.

Westpac has predicted a 15 per cent rise in house prices in 2021, followed by a 5 per cent rise in 2022.

Code announced for property e-conveyancing

In addition, during their quarterly meeting, the council discussed the recommendations of a review of the regulatory framework for property e-conveyancing conducted by a working group of council agencies, the Australian Competition and Consumer Commission (ACCC) and state registrars, and announced that an industry code will be jointly developed by the e-conveyancing platform providers and financial institutions under the governance of an industry steering committee facilitated by AusPayNet.

The council said that it expects the industry to have completed the code by September 2022, subject to any necessary authorisations by the ACCC.

The CFR said: “The working group identified areas where current arrangements could be strengthened to ensure effective competition, improve consumer outcomes (including through innovation) and reduce risk. The council and the ACCC support addressing these areas through a self-regulatory regime.”

[Related: House price rise jeopardises economy: UNSW]