Rise in risky loans could spark APRA action

High-risk home loans are on the rise as the federal government prepares to scale back responsible lending regulations, sparking discussions over whether the banking watchdog will have to step in to help cool the nation’s rapidly heating property markets.

Data from the Australian Prudential Regulation Authority showed the value of new home loans where the debt is more than six times the borrower’s income rose to $21.6 billion in the December quarter last year, an increase of 26 per cent compared to the same quarter in 2019.

APRA said there was $2.1 billion worth of loans issued with a loan-to-value ratio of 95 per cent or more, a 27.4 per cent rise compared to the same quarter in 2019.

The data follows this week’s release of a government report that said changes to responsible lending rules as proposed by Treasurer Josh Frydenberg last year were necessary because current regulations were causing approval delays, and the overall process was too invasive.

It also follows experts sounding warnings over housing affordability after the Australian Bureau of Statistics revealed the total value of new home loans hit a record high of $28.75 billion in January.

At the same time, CoreLogic analysis showed Australia’s median house price hit a record high in February, as home values rose at their fastest rate in nearly two decades.

RiskWise Property Research chief executive Doron Peleg said instead of the rollback of the responsible lending laws that were introduced to protect consumers, credit restrictions would possibly be introduced later this year to slow down Australia’s rapidly rising housing markets.

“APRA’s previous market intervention in 2017 to slow down the pace of investor and interest-only lending showed that targeted measures can be very effective in reshaping the trajectory of the housing market,” Mr Peleg said.

“This time around the dynamics are different. In fact, the share of investor loans has been very low, and the stock of interest-only loans as a share of total mortgage debt is now at record lows and falling.

“Therefore, were any regulatory restrictions to be required later in the year, the measures might take a different policy approach.”

RateCity.com.au research director Sally Tindall said the data indicated risky lending was on the rise, but it appeared the federal government would nonetheless push on with watering down responsible lending laws. 

“In the December quarter, $21.55 billion of new home lending had a debt-to-income ratio of 6 times or higher - that’s 17 per cent of all new lending pushing beyond APRA’s safety barrier,” Ms Tindall said.

“The results are by no means surprising. The combination of record low interest rates and escalating property prices are pushing people to take on more debt. 

“It’s likely we’ll see this increase even further in the next quarter. 

“When it comes to responsible lending we don’t need to send ASIC to the sidelines. What we need to do is what Justice Hayne recommended in the final report on the Banking Royal Commission, and ‘apply the law as it stands’.” 

Mr Peleg, however, said he believed there was no immediate need to slow down the flow of credit.

“Australia’s housing market is only just heating up now, and capital city prices are still tracking at around 2017 levels, so there will be no urgency to bring in credit restrictions,” he said.

BuyersBuyers.com.au co-founder Pete Wargent said the market would likely correct itself, with more sellers to come to market in coming months to alleviate the supply-demand imbalance. 

Mr Wargent said new measures to restrict the flow of credit should only be introduced if it became essential to slow the market towards the end of the year. 

“Only a few short months ago some high-profile commentators were making bold (if largely substantiated) claims about a housing market calamity, so it’s a bit of a stretch to say that the supply of credit should be throttled back already,” Mr Wargent said. 

“We still have many borrowers on deferred mortgages too, and tighter lending restrictions will do nothing good for them,” Mr Wargent said.   

“My opinion is that unless there’s been clear evidence of pro-cyclical deterioration in lending standards, macroprudential measures should ideally be ‘set and forget’.  

“Constant fine-tuning makes it very tough for market participants, including homebuyers and developers, to make important life and business decisions in good faith.” 

For investors, Mr Peleg said the focus should be on properties with a high level of owner-occupier appeal, with regulatory intervention usually tending to have a greater impact on off-the-plan apartments and high-rise units.