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APRA is not declaring victory yet in its effort to curb risky lending and can still modify its rules as more permanent measures take effect, said APRA chairman Wayne Byres.
These initiatives will include further bolstering assessment of borrower serviceability, stronger capital requirements for mortgage lending, and comprehensive credit reporting as mandated by the government, said Byres.
This suggests the prudential regulator has no immediate plans of lifting the restrictions it put in place to temper competitive pressures in the housing loan market, including risky lending.
“While the direction in asset quality is positive, we’re not declaring victory just yet. We still want to see that the improvements the industry has made are truly embedded into industry practice,” said Byres at the A50 Australian Economic Forum last week.
But Byres reiterated that the restrictions are temporary measures to reduce risky lending amid fears that the drive for growth was adversely affecting the market as lenders tried to "accommodate "higher risk propositions”.
“Instead of prudently trimming their sails to reflect an environment of heightened risk, lenders were pressured to sail closer to the wind,” said Byres.
APRA introduced limits to investor lending in 2014 and to interest-only lending in 2017 – moves that are generally believed to have strongly contributed to the cooling housing market, particularly in Sydney.
While acknowledging that house price growth has slowed in Sydney and Melbourne, Byres said the broad environment – high house prices, high household debt, low interest rates, and subdued household income growth – has not significantly changed over the past year. He said these conditions are not unique to Australia.
“What’s notable for Australia, however, is the relatively high proportion of mortgage lending on the banking system’s balance sheet.”
Byres said APRA’s interventions have served their purpose and that lending standards have improved.
He noted that the industry has been successful in ensuring no more than 30% of new lending is interest-only. He cited data for the fourth quarter of 2017 showing that only about 1-in-5 loans were interest-only and that the number of interest-only loans with high LVRs continued to fall.
“All of that is positive for the quality of loan portfolios,” he said.
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