Key Takeaways
- Housing risk in Australia is intensifying as reflected in big increases in house prices, home lending growth, and higher debt-to-income lending.
- We believe the regulator's initial measures to increase lending buffers and rein in risk will have limited impact.
- We expect further macroprudential measures to follow.
Soaring house prices in Australia are no longer just a problem for frustrated home buyers. Higher prices, home lending growth, and higher household debt present systemic risks for Australian banks. The regulator, the Australian Prudential Regulation Authority (APRA), has sought to mitigate these risks by introducing macroprudential measures. The announced measures will have limited impact, in our view. Consequently, we expect more regulatory actions on this front in the next few months.
House prices in Australia grew rapidly by about 12% in the first six months of 2021; to date this growth trend has continued. The growth in residential property prices reflects the current very low interest rate environment as well as ongoing supply shortages.
This time around, anecdotal evidence suggests that the growth in property prices is widespread across capital cities and regional areas whereas previous growth spurts occurred mainly in Australia's two largest cities, Sydney and Melbourne.
Chart 1
Home lending growth has also accelerated to about 6.1% (12-month period to August 2021) from about 3.4% (12-month period to December 2020). Lower interest rates and higher property prices were the two key factors that supported the higher growth in home loans.
Chart 2
We doubt that banks loosened their lending standards to drive growth in home lending. Lending characteristics appear to have either improved or remained largely unchanged in the past year. This is reflected in the proportion of new investor, interest-only (IO) and high loan-to-value ratio (LVR) lending. Anecdotal information also suggests that some of the banks have tightened their lending practices in recent months. That said, as of June 2021 the proportion of the major banks' new lending at debt-to-income higher than six times (x) has increased substantially to about 22% of new lending as of June 2021, compared with 17% a year ago.
Table 1
| Selected New Residential Mortgage Lending Standards Statistics | ||||||
|---|---|---|---|---|---|---|
| June 2020 | June 2021 | |||||
| Investor and interest-only portion of new loans funded | ||||||
| Investor | 30% | 28% | ||||
| Interest-only | 20% | 18% | ||||
| Owner-occupier: LVR of new loans funded | ||||||
| 90%<LVR<95% | 10% | 10% | ||||
| LVR>95% | 2% | 1% | ||||
| Investor: LVR of new loans funded | ||||||
| 90%<LVR<95% | 3% | 3% | ||||
| LVR>95% | 0.7% | 0.5% | ||||
| Debt-to-income ratios of new loans funded (owner-occupier + investor) | ||||||
| >6x | 17% | 22% | ||||
| LVR--Loan-to-value ratio. Source: APRA Quarterly authorized deposit-taking institution statistics. | ||||||
Risks Rising
We believe rising house prices and accelerating home loan growth typically lead to a buildup of risk for a banking system. Residential mortgages account for almost two-thirds of bank lending in Australia. If house prices plunge and unemployment rises, bank customers will be less able to service loans. This could lead to a material rise in credit losses, and consequently hurt the creditworthiness of the entire banking sector. These risks are accentuated when property prices and household debt have risen rapidly.
APRA has fired the first shot to mitigate these risks, but it is unlikely to achieve much. APRA, as a member and in consultation with the Council of Financial Regulators (CFR), recently announced macroprudential measures to increase the minimum interest rate buffer by 50 basis points (bps) to 3% above the loan product rate when assessing the serviceability of new home loan applications.
We believe this is likely to have only limited success in arresting the rising risks to the banking system, or house price growth. This is mainly because only a small proportion of customers borrow at their absolute capacity; some borrowers are already constrained by the floor rate; and investors may also be sitting on liquidity buffers, in our view.
APRA's own assessment suggests that a 50bps increase in the serviceability buffer will reduce maximum borrowing capacity for a typical borrower by about 5%. APRA chose this measure because it acts as a cap on higher leveraged lending, is simple to implement, and will not affect mortgage interest rates. In addition, APRA has asked the banks to examine their risk appetite and monitor their residential portfolio concentrations of high debt-to-income loans.
Further Macroprudential Measures Likely
APRA (and the CFR) are likely to reload and introduce further macroprudential measures--such as restrictions on high debt-to-income lending--in our view. We understand that the CFR will look to tailor its actions to address emerging risks and avoid unintended consequences such as the impact on first-home buyers.
Other macroprudential measures, including caps on high LVR lending, interest-only loans and investor loans, are less likely as they are not key factors in the risk buildup in the current cycle, in our view. We note that caps on interest-only loans and investor loans were successful in 2017 to 2019 and supported an orderly unwinding of housing risks (especially in interest-only loans and investor loans) that had built up in the periods prior.
Our current ratings on Australian banks--most of which are on positive outlook--factor in our expectation that the regulators will take timely and effective actions to mitigate risks from rapidly rising house prices and home loan growth. Failing this, the upside for our ratings on the Australian banks is likely to recede.
This report does not constitute a rating action.
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
| Primary Credit Analyst: | Nico N DeLange, Sydney + 61 2 9255 9887; nico.delange@spglobal.com |
| Secondary Contacts: | Sharad Jain, Melbourne + 61 3 9631 2077; sharad.jain@spglobal.com |
| Lisa Barrett, Melbourne + 61 3 9631 2081; lisa.barrett@spglobal.com |
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