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APRA Keeps Its Finger On The Trigger

The Australian Prudential Regulation Authority (APRA) is getting trigger-happy about housing investment.

APRA Chairman Wayne Byres said this month that housing lending remained the regulator’s main focus. He added that the nation’s banks should be “under no illusions” that any breach of the 10% annual cap on investment lending it imposed in late 2014 would result in further regulatory intervention that may hit profits.

“If that is encouraging them [the banks] to direct their competitive instincts elsewhere, then that’s probably a good thing for the system as a whole,” he told an economic forum in Sydney this month.

Loans still contained

His warning comes despite the fact that total investor loans for housing rose by 3.2% to $545 billion in the year to December 2016. That’s well below APRA’s 10% ‘speed limit’, but even so, CBA and AMP Bank have heeded the call and increased their investor loan rates.

This shows that some lenders are getting bigger slices of the investment business and approaching their caps. Still, it remains to be seen whether the other banks opportunistically ratchet up their lending rates.

Australia Outstanding House Loans

Housing heat a concern

Nevertheless, all three key financial regulators – APRA, the Australian Securities and Investments Commission and the Reserve Bank of Australia – are concerned about the risks posed by an overheated housing sector.

Byres’ backhander follows yet another warning from the International Monetary Fund (IMF), which has been vocal for a long time about the dangers of a housing bubble in Australia. The IMF says local regulators should double their efforts to ensure the nation’s banks are resilient enough to “withstand a significant housing market correction”.

The trouble is that not too many market watchers in Australia say that’s actually likely in the near future.

“We continue to pay close attention to the housing market and to household balance sheets,” Reserve Bank of Australia Governor Philip Lowe says. “The picture varies widely across the country. Prices for houses in Sydney and Melbourne are rising strongly, but apartment prices in some cities, including Perth and Brisbane have fallen.

Housing Prices

“The population is growing strongly, but there is a large number of additional dwellings to come onto the overall market this year. Growth in rents is weak, but vacancy rates in most markets are not unusually high. And investor demand looks to have strengthened in the closing months of 2016. So, it is a complex picture.”

The total value of outstanding housing loans at the end of 2016 was $1.6 trillion, of which owner-occupiers held $1 trillion.

But even here the picture varies state by state. Housing investors are the most active in NSW, accounting for 57% of the mortgage demand across the state, according to NAB Group Economics data. Tasmania has the lowest investment activity, making up just 28% of this market.

Household debt remains high

“One reason for trying to understand this complex picture is that the level of household debt is relatively high,” Lowe says. “Overall, households are coping reasonably well with this. But there are clearly risks. So, it is a positive development that over the past couple of years, banks have tightened their lending standards in some areas.”

Household Wealth and Liabilities

Nevertheless, APRA’s Byres recognises that the banking industry has been “assiduously building its capital strength in anticipation” of future policy changes through increased capital ratios.

“Assuming the industry continues to steadily build its capital, we expect it will be well placed to respond to policy changes in an orderly manner,” he says.

So, if everyone is playing by the rules, what’s the big deal? In regulatory terms, this is called jawboning, nothing more.

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