Aus bubble fears trigger mortgage rules
The Australian bank regulator has intensified its crackdown on risky lending, pushing back against a potential property bubble and increasing the Reserve Bank of Australia's capacity to keep interest rates at a record low.
Concerned fierce competition for customers is driving down lending standards, the Australian Prudential Regulation Authority (APRA) on Monday issued tough guidelines on how it expects banks to monitor and manage mortgage risks.
This includes making banks consider geographic concentrations of risky loans; limits on loans relative to incomes; stress-testing borrowers; and avoiding giving managers financial incentives to make more loans.
Analysts said the draft guidelines, which fall just short of the "macro-prudential" rules adopted by regulators in New Zealand and Canada, mean the pace of growth in the mortgage market and house prices may have peaked.
RP Data reported on Monday that house prices have eased across capital cities in recent weeks amid a slump in confidence following this month's federal budget.
However, raising the heat on banks shows regulators have become increasingly wary of a runaway housing market, where prices are up almost 18 per cent in Sydney from a year ago and 11 per cent in Melbourne.
APRA chairman John Laker said credit standards were a major focus given rising house prices and "very active competition" between lenders.
"In this environment, APRA is seeing increasing evidence of lending with higher-risk characteristics and it does not want this trend to continue,'' he said.
The new guidelines emphasise the importance of "prudent" lending standards - a sign APRA has become concerned about the threat to financial stability from the mortgage market.
Increased risk taking by banks and an overly exuberant property market would create a major headache for the Reserve Bank of Australia (RBA), which has signalled in recent weeks that it wants to keep the cash rate at 2.5 per cent for some time.
Monetary policy is currently going through its most stimulatory phase in almost 15 years to cushion the economy against budget cuts and the end of the resources investment boom.
So far, the RBA has been reluctant to support rules that would limit booming house prices, even though counterparts in other countries have moved in that direction. New Zealand last year imposed limits on low-deposit mortgages, and this month Bank of England governor Mark Carney warned that surging house prices were the UK's biggest threat to financial stability and economic growth.
By effectively leaning on banks and attempting to put downward pressure on house price growth, APRA should help the RBA keep the cash rate lower for longer and avoid driving the dollar higher through rate hikes.
"You could call this heavy-handed macro prudence rather than macro-prudential," said UBS senior interest rate strategist Matthew Johnson.
"It's definitely a shot across the bow, and they're telling banks, 'don't speed up asset growth and lending growth by lowering standards further.'
"That means we've probably seen the peak in the pace of lending growth and in house price growth, given that the banks cant speed up credit growth by lowering standards further."
The acting chief executive of the Australian Bankers' Association, Diane Tate, said the industry had expected the new guidance.
Competition for new customers is intensifying in the banking industry. Commonwealth Bank of Australia, National Australia Bank and ANZ Bank have expanded their home lending faster than the industry average over the past year. Westpac has accelerated lending growth.
Analysts say one way the banks have sought to win more customers is by offering more generous incentives to mortgage brokers. APRA said banks should make sure these incentives do not lead to extra risk taking, noting that larger up-front commissions encouraged brokers to pay less attention to loan quality.
''Trailing commissions are more likely to provide incentives for brokers to retain and monitor customers,'' APRA said.
The guidance also touched on lending standards. APRA said it expected banks to closely monitor the share of new loans with high loan-to-valuation ratios (LVRs). While Australia has no caps on LVRs, it said those above 90 per cent clearly exposed banks to a higher risk of losses.
Mortgages have proven highly profitable for banks in recent years due to low default rates, but APRA said the boom-time conditions could result in risks being overlooked.
''Historically, residential mortgage exposures have exhibited low default and loss rates," it said in the draft.
"However, lengthy periods of economic growth combined with low interest rates and a sustained period of rising house prices can create a sense of complacency among residential mortgage lenders.''
Mortgage lending accounts for more than half the credit exposure of the Australian banking system.
APRA said this concentration meant lenders should pay particular attention to the segment.
Boards of authorised deposit-taking institutions should remain alert to the risks of rapid expansion in mortgage lending, APRA said, and directors should seek explanations when lenders were growing faster than their rivals.
''Rapid relative growth could be due to an unintended deterioration in the ADI's loan origination practices, in which case APRA expects that an ADI's risk management framework would facilitate rapid and effective measures to mitigate any consequences,'' the guide said.
APRA is taking feedback from the industry on the policy until late July.