Speaking to the House of Economics standing committee of economics on Thursday, CBA chief executive Matt Comyn said the bank is growing “increasingly concerned” with rising housing debt and house prices.
Mr Comyn commented that he had not worried about the past growth rates for housing prices, credit and income in the past 12 months – but there could be trouble in the future.
“As we have seen in other markets – New Zealand being a good example, but not limited to New Zealand – in many, many developed markets, it is much harder to act when the market is accelerating, versus taking interventions to try to avoid too much of an acceleration,” he told the committee.
“I think we all would have a shared concern about making sure that Australia’s households are in a strong position to continue to repay [debt] but also support broader consumption in the economy in the second half of this decade, if interest rates are rising and if potentially, they were to rise more quickly," he later continued.
CBA raised its benchmark serviceability floor rate in June, to 5.25 per cent – stating it was an effort to ensure the bank continued to lend responsibly in the current low-rate environment.
Mr Comyn explained the change was the bank’s preferred mechanism to deal with rising debt levels and that it would be important for the sector to take anticipatory steps, rather than reacting.
“We think we and the industry could – obviously I don’t want to speak for the rest of the industry – but we think it could be important to take some modest steps sooner rather than later to take some of the heat out of the housing market,” he said.
“But I want to be clear, I’m not concerned about the point that we are here today. But based on the acceleration, I think it would be prudent to act sooner rather than later.”
The day before, the Reserve Bank of Australia (RBA) had similarly raised the alarm on the housing boom and rising debt levels, warning it could lead to cracks forming in Australia’s financial stability.
Driven by low interest rates, government stimulus such as HomeBuilder and rising prices, the RBA expects housing credit growth to peak at an annualised rate around 11 per cent early next year, from its current level of around 7 per cent.
In the event of a shock, RBA assistant governor (financial system) Michele Bullock warned the banks, with around 60 per cent of their loan books being in mortgages, would be highly exposed, while high levels of household debt could also considerably weaken spending and in turn, the economy.
ANZ CEO Shayne Elliott also recently made like-minded comments, stating that in the current environment, banks should tighten their lending standards and they shouldn’t rely on regulators to do what is right.
Appearing before the committee on Thursday, Mr Elliott reported ANZ is being more careful, taking more time to ask more questions during the loan application process and to assess borrowers’ capacity.
Mr Comyn noted that CBA has had regular dialogue with both the Reserve Bank and APRA and echoing Mr Elliott, commented the “best regulation is self-regulation”.
“We shouldn’t be entirely dependent on being instructed by the regulator, nor were we in June,” he said.
Despite a fall in business and consumer confidence through the lockdown period in Sydney and Melbourne, CBA has not seen a slowdown in applications and fundings, with the market still being “very active”.
Mr Comyn also noted there had been a slight uptick in investor applications, but it is not yet at concerning levels.
“If we went back to 2015, in markets like Sydney, we were seeing 65 per cent of applications being in investor. We were seeing investor lending growth growing at more than 10 per cent,” he said.
“I mean it’s 2 per cent now. So it’s a very different composition of market.”
Comyn warns against LVR caps
In New Zealand, the central bank has further tightened already existing restrictions on high loan to value ratio (LVR) lending, amid fears around a rise in risky lending.
On Thursday, the Reserve Bank of New Zealand confirmed that it would tighten the amount of lending banks could do above an LVR of 80 per cent to a tenth of all new loans to owner-occupiers, half of the current 20 per cent limit.
The new settings, effective from 1 October, have followed earlier restrictions in March, when RBNZ installed LVR restrictions on both owner-occupier and investor loans to 20 per cent. It then further capped limits for investor lending to 10 per cent of portfolios in May.
RBNZ deputy governor and general manager for financial stability Geoff Bascand reported lending at LVRs greater than 80 per cent had nearly tripled since 2017, with the majority of loans going to first home buyers.
Meanwhile in Australia, APRA recorded a rise in high debt-to-income lending during the June quarter, with its chair Wayne Byres expressing concern. However, the watchdog has said it will not yet commence any action, as other risk metrics have decreased.
Both the prudential regulator and the Reserve Bank of Australia (RBA) are monitoring the housing and lending markets, having discussed what tools they would be prepared to use, should they need to intervene.
RBA governor Philip Lowe pointed to example measures such as raising the minimum interest rate banks use for home loans, or limits on high loan-to-value ratio (LVR) or high debt-to-income lending in banks’ portfolios.
Considering if Australia could mirror New Zealand’s strategy, Mr Comyn expressed some doubts.
“Some of those measures also impact particular cohorts of borrowers more so than others, for example, first home buyers,” he said.
“If you’re asking me what do we think the preferred implementation mechanism is, I would suggest that it’s the benchmark for floor servicing. It’s very transparent, it’s very easy to implement, it’s effectively the rate that you’re testing serviceability, you can apply it to banks and non-banks.”
Stretching the floor servicing benchmark could impact first home buyers who are already at the maximum of their borrowing capacity, Mr Comyn said, but he didn’t believe there is a “perfect sort of public policy measure” and it would be hard to design.
Similarly, Mr Elliott noted: “I think, whichever tool you choose there’s always going to be winners and losers from that.”
However, the ANZ CEO commented such macroprudential controls could entrench positions in the competitive landscape.