Regulators cast eye on risky lending uptick

During its recent quarterly meeting, the Council of Financial Regulators (which includes APRA, ASIC, the Reserve Bank of Australia [RBA] and Treasury) homed in on housing market risks.

Recent data from APRA had shown loans with a high debt-to income (DTI) ratio continued to creep up during the December quarter.

During the three months to December, new residential mortgages with a debt-to-income ratio of six times or more were 24.4 per cent of the total combined books, slightly more than the 23.8 per cent in the September quarter.

APRA and the Reserve Bank had previously raised the alarm on an uptick in high DTI lending, as new loans to borrowers at more than six times their income had grown by 5.8 percentage points in the year to June 2021. The segment made up 21.9 per cent of new mortgages.

As a result, APRA intervened and introduced a higher loan serviceability buffer rate, which came into force from November. Banks were forced to consider borrowers’ ability to meet an interest rate 3 percentage points above the product rate – compared to the previous 2.5 percentage points.

The move, which would reduce maximum borrowing capacity for the typical borrower by about 5 per cent, was expected to have a larger impact on investors than owner-occupiers.

“APRA’s decision in October to increase banks’ minimum serviceability buffer for housing lending reduced the maximum borrowing capacity of some borrowers and has helped strengthen new borrowers’ resilience to future shocks,” the Council of Financial Regulators (CFR) said in its March quarterly statement.

The regulators have considered what banks are doing to manage the risks within their portfolios and have pledged to “continue to assess the need for further macroprudential measures”.

APRA has previously warned that it may need to introduce further measures following the buffer rise, having laid out its potential macro tools.

“It is important that lending standards are maintained and that borrowers have adequate buffers, especially in an environment in which housing loan interest rates are at historically low levels and are expected to rise over time in line with the economic recovery,” the CFR said.

In the December quarter, another indicator for risky lending had also climbed. New lending at high loan-to-value ratios (LVRs) had remained low, but the segment had also crept up during the three months to December, after declining for three quarters.

The share of new lending at LVRs greater than or equal to 90 per cent rose to 7.9 per cent in the December quarter, from 7.5 per cent in the previous quarter.

However, APRA noted new lending at lower LVRs remained high, with 63.3 per cent of all new loans funded at LVRs less than 80 per cent.

Meanwhile the CFR’s statement also referred to strong home loan growth through 2021, suggesting the rise will continue into the months ahead.

But, it also observed that house price growth has started to ease in some locations.

[Related: RBA bides times as inflation accelerates]