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Risky lending rise pricks APRA’s ears

The regulator’s chair has expressed concern with an uptick in high debt-to-income lending, but has said there will be no intervention for now.

Reflecting on the mortgage market in recent months, APRA chair Wayne Byres told the House of economics standing committee on economics on Friday that there is a “mixed picture” in the latest risk metrics.

As captured in recent quarterly statistics from the regulator, outstanding housing credit hit $1.9 trillion in June, 4.7 per cent more than a year before.

New home loans during the three months to June came to $156.2 billion, with 70.6 per cent taken up by owner-occupiers and 27.8 per cent being investors. Investor lending had declined by 1.4 per cent from the year before, while owner-occupiers rose by 1.5 per cent.

However there had been a 5.8 percentage point rise in lending with a high debt-to-income ratio (six times or more), up to 21.9 per cent.

Mr Byres noted at the same time, other risk metrics fell, including the share of lending with high loan-to-valuation ratios (LVR), which was down by 0.6 per cent to 8.6 per cent of loans.

“Well the plight, as I said, it’s a complex picture. We’re weighing up a raft of different considerations. There are risk metrics that tell us different things,” Mr Byres told the committee.

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“The issue of concern and present is that there is an increase in high debt-to-income lending but it’s offset against a number of other metrics, which are going in a more positive direction from a prudential perspective.”

He added the regulator is yet to see any signs of standards deteriorating, with balance sheets still strong, and “no obvious poor quality lending going on”.

The Reserve Bank of Australia (RBA) has previously indicated that it is watching the housing and mortgage markets and working with APRA to collect data on the banks.

Speaking to the committee about a month ago, RBA governor Philip Lowe said he was yet to see any sign of erosion in lending standards, but the regulators have begun to consider what tools they should use to intervene, should they deem it necessary.

Such policies listed by Dr Lowe could involve raising the minimum interest rate that banks use for home loans, as well as restrictions around portfolio LVR or debt-to-income.

“The key issue of present that we’re watching is less prudential and more macro. It’s really looking at household debt levels and the extent to which there is potential for household debt levels to run well ahead of income growth levels for an extended period,” Mr Byres said on Friday.

“And I think the governor said he would be uncomfortable with that and I would also be uncomfortable with that.”

NAB chief executive Ross McEwan also appeared before the committee the day before APRA last week, when he stated he would recommend the regulator wait for the spring house sales season and for a few months to play out post-lockdown before taking its next steps.

Both Mr McEwan and Westpac CEO Peter King (who also appeared on Thursday) acknowledged rocketing house prices, with Mr King conceding housing affordability is “stretched”. Mr McEwan stated NAB would have “major concerns” if the price rise continued.

When asked about Mr McEwan’s suggestion to wait out the traditionally busy spring period for property sales, Mr Byres indicated a wariness about the potential movement of house prices.

“Well certainly, we’re cautious of the current environment and the way it could play out,” he said.

[Related: NAB to answer to AUSTRAC probe]

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