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Speaking at the Australian Business Economists Lunchtime Briefing in Sydney today, Mr Byres said that “there is no room for complacency” in the Australian banking system when it comes to home lending.
“The quality of lending for housing is too important not to be the subject to a great deal of scrutiny,” he said.
Commenting on bank mortgage portfolios, Mr Byres said that APRA’s primary concern has been that, in the face of ample credit and strong competition for new and existing customers for many years, there is the potential for "a slow but steady erosion of credit quality".
“Lower credit quality portfolios, of themselves, may not necessarily be worrisome if the strategy is a conscious one, the additional risk is appropriately priced and managed, and adequate capital is held,” he said. “That is really what much of our work has been designed to test.”
Mr Byres commented on the recent report by ASIC, released last week, which raised concerns about the growth in interest-only loans.
“This is not just because investors – who typically make greater use of interest-only loans – are a larger share of lending; investors have been increasing their use of interest-only lending,” he said. “So have owner-occupiers.
“There are many reasons offered for why this might be, but the increasing prevalence of interest-only lending does reduce the committed build-up of borrowers’ equity buffers that principal-and interest loans naturally provide.”
Mr Byres said that Australians have, thus far, not been taking advantage of record low interest rates to fix the rates on their borrowings.
“Obviously the sensitivity of borrowers to any increase in interest rates in the future will be a function of the extent to which they have maintained variable rate loans,” he said.
“At least thus far, there is little evidence that this sensitivity is being reduced.”
The APRA boss said that there is reason to conclude that housing portfolio risk profiles might have increased, and underwriting standards softened, over time.