The Australian Prudential Regulation Authority (APRA) has issued new guidance pertaining to Prudential Standard 112 (APS 112), which requires authorised deposit-taking institutions (ADIs) to revalue property offered as security for residential mortgages if they become aware of a “material change” in property values in an area or region where the security is located.
Properties are revalued to ensure that the capital held by ADIs adequately reflects the credit risk profile of the mortgage.
APRA has previously proposed to scrap the requirement as part of broader review of its guidance on regulatory capital.
The regulator has now confirmed that, effective immediately, ADIs using the standardised approach for calculating credit risk – based on external credit ratings – will no longer be expected to revalue residential mortgage properties in compliance with APS 112.
APRA acknowledged that property price reductions were already factored in to credit risk assessments.
“The rationale for this change in part recognised that the calibration of the residential mortgage risk weights in APS 112 already includes an allowance for increases in the risk of residential mortgage exposures, including from house price movements,” APRA stated.
“Additional movements in risk weights from the revaluation of residential mortgage properties has the potential to be excessively pro-cyclical in amplifying ADI capital requirements.”
APRA’s announcements comes amid a second wave of reductions in residential property prices off the back of the COVID-19 crisis.
According to the latest data from property research group CoreLogic, prices fell 0.4 per cent in May – the first monthly decline since June 2019.
Analysts are forecasting property price reductions of between 5 to 10 per cent throughout 2020 and into 2021.