New data released by Australian Prudential Regulation Authority (APRA) has revealed that almost one in four new mortgages are risky.
According to the regulator’s quarterly ADI property exposure report for the December 2021 quarter, 24.4% of new mortgages had a debt-to-income ratio of six times or more, in dollar terms – up from 23.8% in the September quarter and the 17.3% from a year ago.
Debt-to-income ratios of six and over are considered risky by APRA.
The APRA findings come as new ABS data showed residential property prices rose 23.7% in 2021 – the biggest annual rise on record. The latest CoreLogic data shows, however, that growth in property prices is starting to cool in 2022.
APRA responded to rising debt-to-income levels with an increase in the rate at which banks stress test mortgages – from 2.5% to 3% on November 1, 2021.
But even with APRA’s more stringent serviceability test in place for part of the December quarter, the old serviceability buffer was still used to assess customers who had pre-approval but had not yet bought a property by Nov. 1.
Sally Tindall, RateCity.com.au research director, said it was no surprise risky lending rose at the same time property prices skyrocketed.
“Almost one in four mortgages settled in the December quarter had risky levels of debt compared to their household incomes, the price many Australians had to pay to get into an overheated property market,” Tindall said. “APRA has already taken steps to reign in risky lending, by making banks stress test customers on a rate 3% above what they’re currently paying.”
Tindall said the APRA is unlikely to implement any further measures now with property prices already starting to cool, and the RBA poised to hike interest rates
“In fact, after a series of RBA interest rate hikes, we could see APRA reduce its serviceability buffer back down to 2.5%,” she said. “Most Australians with home loans are in a good position to tackle the forecasted interest rate hikes heads on. Mortgage holders have a whopping $231.68 billion in offset accounts, which will offer many a decent buffer when rates rise.”
Analysis by RateCity showed that in order to buy a median-priced house in Sydney, borrowers must have an estimated household income of $188,331 to avoid taking a risky loan. In Melbourne, an income of $133,336 is needed to have a debt-to-income ratio of less than six.
