Curtail Investor Mortgage Growth: APRA – Financial Chronicle – 11-Dec-2014

December 22, 2014 - Uncategorized

Australia’s prudential regulator called on banks to limit growth in home lending to investors to 10 percent a year and said it will step up oversight of mortgages amid surging house prices in Sydney and Melbourne.

Banks should add a 2 percent buffer to their home-loan rates and have an interest-rate floor of at least 7 percent when assessing a borrower’s ability to repay a mortgage, the Australian Prudential Regulation Authority said in a statement yesterday. APRA’s supervisors will review lending practices in the first quarter of 2015 to assess if further action is needed for individual banks, including possible increases in capital requirements, it said.

Regulators are concerned that speculative buying by Australians of homes to rent is creating an unbalanced housing market. Home loans to landlords now account for more than half of all mortgages, the highest share on record, and house prices have soared 13.2 percent in Sydney in the year through November and 8.3 percent in Melbourne.

“We’d expect the changes to see credit growth slow and house price growth to moderate,” Macquarie Group Ltd. analysts led by Michael Wiblin wrote in a Dec. 9 note. “Previous periods of house price moderation have seen the sector underperform.”

The S&P/ASX 200 Banks Index, which tracks seven lenders, dropped 1 percent as of 1:17 p.m. Sydney time, led by Westpac Banking Corp.’s 1.4 percent slide. National Australia Bank Ltd. (NAB) lost 1.1 percent as the benchmark S&P/ASX 200 Index decreased 0.4 percent.

Further Action

Growth in mortgages to property investors “above a threshold of 10 percent will be an important risk indicator for APRA supervisors in considering the need for further action,” the regulator said. “At this point in time, APRA does not propose to introduce across-the-board increases in capital requirements, or caps on particular types of loans, to address current risks in the housing sector.”

The regulator said it will also pay particular attention to high loan-to-income loans, high loan-to-valuation loans, interest-only loans to owner occupiers, and loans with very long terms.

The recommendations are “a shot across the bow to alert banks that their lending practices always need to be prudentially rigorous,” said Andrew Wilson, senior economist at property information firm Domain Group, adding further action is unlikely.

Buffer Rate

Stephen Ries, a spokesman for Melbourne-based Australia & New Zealand Banking Group Ltd. (ANZ), said the bank already applied a 2.25 percent buffer rate above its 5.88 percent standard rate on home loans, higher than the 2 percent proposed by the regulator. That meant the floor rate is already above the 7 percent level proposed by the authority, he said.

Home loans to landlords by ANZ climbed 10 percent in the past 12 months, Deutsche Bank AG analysts wrote in a Dec. 9 report. Commonwealth Bank of Australia’s loans rose 9.4 percent, National Australia Bank increased 11.1 percent and Westpac grew 10.5 percent, according to the report.

Macquarie’s mortgage loans to investors jumped 85.1 percent in the past year from a “low base,” Deutsche Bank said. Lisa Jamieson, a Sydney-based spokeswoman for Macquarie, declined to comment by phone on any requirement to curb lending.

Regulatory Review

National Australia Bank said in an e-mailed statement it “will continue to work cooperatively with the regulators to ensure ongoing prudent lending practices.” Spokesmen for Westpac (WBC) and Commonwealth Bank declined to comment immediately on APRA’s statement.

The Australian Securities and Investments Commission said in a statement yesterday it will investigate banks’ provision of interest-only loans as part of the broader review by regulators into home-lending standards.

Housing loan approvals to investors are almost 90 percent higher in New South Wales than two years ago and 50 percent higher over the same period in Victoria, the Reserve Bank of Australia said in its financial stability review in September.

Growth in credit to housing investors was 9.9 percent in the 12 months through October, according to RBA data. The value of home-loan approvals for investors rose 20 percent in October from a year earlier, the slowest since June 2013, and below a peak of 40 percent in December that year, the statistics bureau said today.

The central bank said in September investors were distorting the market and it was discussing possible measures with regulators including APRA.

The RBA is grappling with the same conundrum that drove its counterparts from the U.K. to New Zealand to tighten lending rules and slow housing while keeping interest rates low to boost the economy. The central bank has kept borrowing costs at 2.5 percent for 16 months and flagged they will remain unchanged to stimulate domestic growth.

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