Pressure is building on the Australian government to crack down on high-debt home loans, while the Australian Prudential Regulation Authority is weeks away from releasing macro-prudential policy framework.
In a speech to the Australian Council of Financial Regulators Treasurer Josh Frydenberg said he would support a clampdown on high-debt loans, following in the footsteps of New Zealand, which had recently brought in stringent loan-to-value ratio restrictions for mortgage lending.
Australian Prudential Regulation Authority data shows one in five households is borrowing up to six times their income to buy a house, which presents significant exposure for banking institutions if interest rates go up ahead of the central bank’s forecast of 2024. According to the Council of Financial Regulators’ quarterly report the council is continuing its discussions around “housing credit conditions and associated risks”.
“Commitments for new housing loans remain at a high level, suggesting that credit growth is likely to remain relatively strong,” the report said.
“The Council is mindful that a period of credit growth materially outpacing growth in household income would add to the medium-term risks facing the economy, notwithstanding that lending standards remain sound.
“The Council discussed macro-prudential policy responses … Australian Prudential Regulation Authority (APRA) will continue to consult with the Council on the implementation of any particular measure.”
APRA is due to release an information paper on its framework for implementing macro-prudential policy later this year.
Australian Bureau of Statistics data for July 2021 showed new home loan commitments for owner-occupiers had dipped 0.4 per cent, while investors have moved back into the market with a 1.8 per cent increase in new loan commitments.
The value of new loan commitments for investors is at its highest since a record-high in April 2015, recording a 98.7 per cent increase year on year.
Loan-to-value ratio restrictions are one of the macro-prudential levers that can be used to help reduce the financial system’s exposure to boom-bust financial cycles as a result of rapid asset growth, rising household debt or excessive liquidity. The ANZ, Commonwealth Bank and International Monetary Fund recently called on the federal government to rein in skyrocketing house prices which was adding to growing affordability issues, and creating more financial vulnerabilities for the finance sector.
Reserve Bank of Australia governor Philip Lowe has acknowledged the record low interest rates had impacted house prices and affordability, but he rejected suggestions that the central bank should address the issue. Lowe said it was the role of groups such as APRA to execute macro-prudential economic measures to effect change and pull back the strong tailwinds driving up house prices. House prices are forecast to increase 20 per cent by the end of 2021, and almost a quarter of home loans are in excess of six times household income according to APRA data.
Australia’s household debt has risen from 70 per cent in 1990 to almost 185 per cent in 2020, with mortgages accounting for about 75 per cent of that debt, relative to gross domestic product. About 60 per cent of the debt held by Australian banks is in residential mortgages, one of the highest globally, with the potential to cause significant financial disruption.