THE banking regulator has moved to head off the build-up of systemic risk as record low interest rates and hot competition fuel property prices, and has warned banks not to relax home lending standards.
Referring to the calamitous fallout in the US from sustained low rates, the Australian Prudential Regulation Authority said it was critical that banks ensured customers could repay when rates "inevitably" increased.
The Australian Prudential Regulation Authority said it was critical that banks ensured customers could repay when rates “inevitably” increased.
The regulator said it would contact several lenders after yesterday releasing a major review of loan approval standards, which revealed shortcomings, including incomplete mortgage documentation…
“A sustained low interest-rate environment poses further risks to lending standards. It is important for ADIs to ensure that new borrowers are able to service debt and afford higher repayments when interest rates rise from current record low levels.
“Recent international experience indicates that a prolonged period of low interest rates can lead to rising household leverage and housing market pressures, with potential flow-on impacts on the credit quality of housing loan portfolios”…
The heightened competition as funding markets improve is driving the big banks to write more interest-only home loans and a large number with high loan-to-value ratios, data from APRA revealed last month.
CLSA analyst Brian Johnson said the banks had been increasing discounts and upfront commission payments to mortgage brokers. The surge in house prices — which had risen by an average of 5 per cent annually in capital cities — had coincided with the RBA’s rate cuts this year, he said.
“It’s also noteworthy that a large proportion of the lending would appear to be investors on interest-only terms,” he said…
Mr Johnson questioned whether rising house prices presented “systemic risk” for APRA and the RBA, noting house prices appeared more stretched than in New Zealand, which has curbed the banks’ high LVR lending.
The financial regulator has warned the nation's banks not to let lending standards slip in an environment of cheap credit, saying borrowers must be prepared for higher interest rates.
As the $1.2 trillion mortgage market heats up, an official audit of lending standards by banks and other lenders has highlighted areas where the sector could lift its game.
The warning by the Australian Prudential Regulation Authority came amid signs the housing market is starting to move ahead with prices posting their strongest quarterly gain since the end of the 2010 boom.
The national dwelling value rose 4per cent in the three months to August, the highest rate of capital gain since April 2010, right before the last boom began to fizzle, according RP Data-Rismark figures released this month. Sydney dwelling values shot up 5.4 per cent over the quarter and values in Melbourne rose 4.8 per cent.
Economists are still tipping the Reserve Bank may cut official cash rates as early as November to help spur growth through the economy as mining investment slows.
An audit of the nation's banks by APRA concluded lenders had policies in place to make sure borrowers could service their debts, but it also identified areas where banks could improve their internal processes when approving home loans.
The audit, conducted this year, assessed the debt-servicing policies used by 27 banks and other authorised deposit-taking institutions in home lending.
Some of the key areas for improvement were: banks should look more closely at borrowers' other debts; some assessments of borrowers' living expenses were too simplistic; and, in a minority of cases, some mortgage documentation was incomplete or inaccurate.
The regulator's report said it was ''critical'' for banks to maintain a strong focus on making sure borrowers could service their debts when interest rates rose. ''Low interest rates can mask debt serviceability assessments, creating opportunities for borrowers to increase their leverage,'' it said.
It said banks and other deposit-based lenders needed to carefully monitor the debt-servicing capacity of their borrowers ''over the duration of housing loans, not just at origination to ensure that borrowers are able to manage the transition to higher interest rates, when that inevitably occurs''.
That's a total 38% subprime loans, far worse than the worst of the USA subprime crisis!
Truly frightening to see so many investors using interest-only loans and being subsidised by taxpayers.
Stealing from the prudent to speculate on house price inflation.
Are you just ignorant and hence unaware that neither a loan's IO vs P&I status nor its lo-doc vs full-doc status are determinants or even good indicators of its prime vs sub-prime status, or are you being dishonest?
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
That's a total 38% subprime loans, far worse than the worst of the USA subprime crisis!
Truly frightening to see so many investors using interest-only loans and being subsidised by taxpayers.
Stealing from the prudent to speculate on house price inflation.
Are you just ignorant and hence unaware that neither a loan's IO vs P&I status nor its lo-doc vs full-doc status are determinants or even good indicators of its prime vs sub-prime status, or are you being dishonest?
sadly every regular commenter from macrobusiness thinks that I/O = subprime.
I think it's part of the way that they kid themselves that the world really is about to crash.
I'm not really sure whether this is bullion baron though, it could be a sockpuppet.
Bullion Baron says: September 11, 2013 at 11:27 am @Mav, because for the most part they would be also paying down the mortgage on a PPOR (or putting excess funds into an offset account), they are better off concentrating excess funds against non deductible debt than deductible debt. Also IO repayments could potentially increase serviceability for a higher amount of debt / more properties. There are other reasons too.
Are you just ignorant and hence unaware that neither a loan's IO vs P&I status nor its lo-doc vs full-doc status are determinants or even good indicators of its prime vs sub-prime status, or are you being dishonest?
Fair enough, but please feel free to tell us why a high % of IO loans are not indicators of speculative stupidity and therefore a bubble.
From my vantage point I see my parents going cash flow negative with their their IO property in Orange since the gold miner lost his job and they had to drop the rent 20% after being vacant for 2 months. Along with the pathetic yields I've already mentioned in my area of Sydney I'd say we're quickly moving from 'speculative' to 'ponzi' phase.
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness. "Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
Let’s say you own a property worth $360,000, with a $300,000 interest only loan at 7%. Your monthly repayments would be just $404 per week. On the other hand, with a standard principal and interest (P & I) loan, the weekly repayment would shoot up to $534.
Clearly, the immediate cost savings are significant, and they can help to ease the financial pressure in the short term - but it comes at a price.
The main disadvantage is that you’re making no headway on your overall mortgage. In the above scenario after five years have passed, you’ll still owe $300,000 on the property if you take out an interest only loan. With a standard P & I mortgage, after five years you would have shaved a good $50,000 off the balance of your home loan.
Essentially, this means that you will not have the benefit of gaining equity in your home, even though you are making mortgage payments every month.
Investors work around this by predicting that in five years time, the value of the property will have increased anyway. They hope that their $360,000 property will be worth at least $400,000, so they will have equity in the property without having paid a single cent off the principal.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
Maybe you could ask Mr goldbullion over at macrobusiness to explain it to ya Veritas. I/O has tax advantages that encourages its use among Mr and Mrs sensible investor.
Definition of a doom and gloomer from 1993 The last camp is made up of the doom-and-gloomers. Their slogan is "it's the end of the world as we know it". Right now they are convinced that debt is the evil responsible for all our economic woes and must be eliminated at all cost. Many doom-and-gloomers believe that unprecedented debt levels mean that we are on the precipice of a worse crisis than the Great Depression. The doom-and-gloomers hang on the latest series of negative economic data.
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness. "Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
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