‘Sydney, Melbourne house prices at new highs in September,’ ran a headline in The Australian. Nothing new there.
Interest rates and unemployment are both still low, and immigration remains strong. Still no changes.
Yet the Australian Prudential Regulation Authority (APRA) is tightening mortgage rules. You see, APRA is now asking banks to make sure new borrowers can repay their debts with an interest of up to 7%, even if they expect rates to remain low.
Hang on a minute; shouldn’t mortgage lenders already be factoring this in? After all, just eight years ago the cash rate was at 7%.
Well, APRA had never specified before how big the buffer should be between the interest rate paid and the potential cash rate increase.
As the Sydney Morning Herald reports: ‘Banks advertise interest rates well below 4 per cent for new customers but APRA said a “prudent” bank would have an assessment rate of at least 7 per cent.’
APRA’s chairman, Wayne Byres, has already criticised lending standards and complained that some lending decisions ‘lacked common sense.’ During a Senate hearing in Canberra last year, he ‘highlighted the regulator’s surprise at how far bank credit standards had been eroded by competition between banks,’ as reported by the Sydney Morning Herald.
The fact is, risky practices like interest-only mortgages have been on the rise in recent years. According to ASIC, two out of three investor loans are interest-only loans. The total amount borrowed on interest-only loans has increased from $88.7 billion in 2012 to $153.8 billion in 2015.
APRA is not the only one calling for tighter lending restrictions, as the SMH reports: ‘Lenders have also responded to pressure from the Reserve Bank of Australia, ASIC and APRA to reduce lending to higher risk investment borrowers, particularly for apartment markets in central Melbourne and Sydney, by cutting back on interest-only loans and increasing deposits to about 40 per cent of the asking price.’
And mortgage lenders are starting to get nervous. They are now blacklisting ‘risky’ suburbs.
Earlier this year, AMP blacklisted 140 suburbs. Buyers in these areas face tougher lending conditions. The ‘blacklist’ includes all Australia’s major cities.
NAB has gone a step further. Their list includes 600 towns and suburbs; they’ve even created lending categories.
Suburbs in category A — in WA, SA, NT and Queensland — have loan to valuation ratios capped at 70%. In category B — includes suburbs in Melbourne and Sydney — loan to value ratios are capped at 80%.
Westpac, Bendigo and Adelaide Bank are also tightening their lending criteria and increasing deposit requirements.
The fact is that property price growth continues to outpace income growth. Mortgage Choice’s chief executive John Flavell told the SMH: ‘Property prices are increasing more than 7 per cent, or more than three times the rate of increase in average incomes.’
And Australian households have been bingeing on debt to keep up with property increases. Australian household debt to GDP has reached a whopping 125.2%, which has caused the IMF to recently single out Australia.
So, after years of happy go lucky lending, do mortgage lenders smell a ‘bubble’ brewing?
For Markets and Money