CANBERRA: Australian banks are reining in their most profitable business after increasingly stern warnings from regulators that tighter mortgage lending standards may be needed to prevent a housing bubble in Sydney from destabilising the financial system.
The country’s four major lenders, Commonwealth Bank of Australia (CBA), Westpac Banking Corp, ANZ Banking Group Ltd and National Australia Bank have all begun to tighten lending to investors in recent weeks. The measures include stricter criteria to approve investor loans, pulling down interest rate discounts and raising deposits on investor loans to up to 20 percent, from as little as 5 percent just a month ago.
This is a big shift for Australia’s banks, which emerged from the global financial crisis to post record profits in recent years on the back of mortgage lending. Home loans account for 40 percent to 60 percent of the major banks’ total loans.
“If the regulators force the banks to slow investor lending growth and it isn’t offset by any significant pick-up in owner-occupied housing or business credit, this will no doubt hurt revenue growth,” said Omkar Joshi, an investment analyst who helps oversee about A$1 billion at Watermark Funds Management.
Policy makers and the Australian Prudential Regulatory Authority (APRA), the banking watchdog, are sounding alarm bells over the rising risks to the financial system from the red hot Sydney property market.
Home prices in Australia’s biggest city have soared 40 percent in three years, fuelled by interest rate cuts to historic lows. On Monday, Treasury Secretary John Fraser told a senate hearing that Sydney was “unequivocally” in a housing bubble.
Compounding the regulator’s concerns, the major banks’ reserves against potential losses in their mortgage books have fallen since 2008 even as profits reached record highs, thanks to the use of in-house risk-management models.
Regulators have flagged the need for the major banks to set aside more capital against their mortgage book, a move that could further hit earnings and investor returns. Analysts expect risk weights on mortgages to rise to 25-30 percent from 14-19 percent now.
The “Big Four” banks are together expected to raise between A$22 billion and A$41 billion to boost their capital reserves in what will be the their biggest fund raising in history, analysts estimate.
Bankers complain that APRA officials are “camped” in their mortgage departments, ensuring they keep growth in investment loans below a 10 percent annual speed limit and tighten standards on products such as interest-only loans.
Home loans to investors have outpaced growth in owner-occupied loans in recent months, and now account for a third of the A$1.5 trillion ($1.15 trillion) home loan market, regulatory filings show. That, coupled with subdued income growth, rising household debt and unemployment, has APRA warning openly about “heightened risk” to the financial system.
Mortgage brokers have seen an increase in the number of enquiries from customers who have found it tougher to get loans from their existing banks. Sydney-based Smartmove, a mortgage broking advisory firm, said it was fielding more enquiries each day from clients seeking help to navigate the more complicated home-loan market.
“There are many disgruntled customers who are affected by the new policy changes,” Smartmove co-founder Simon Orbell said, referring to would-be property investors who are being turned off by the major banks’ tougher lending practices.
Even so, some analysts believe the lending squeeze will need to tighten further in the months ahead to properly address the mortgage-related risks to the banks’ books.
“Capital levels that banks have to hold against their mortgages … could go up quite significantly. That will slow down their home loan growth further,” said Shaw Stockbroking analyst David Spotswood. Mortgage brokers said tinkering with discounts and even higher interest rates were unlikely to significantly deter investors. What mattered most were tougher deposit requirements.
Except for CBA-owned Bankwest, which has lowered its loan-to-value (LVR) ratio – or the mortgage amount divided by the appraised value of the property – to 80 percent, others have that ratio at 90 percent or higher. While there is no regulatory limit on LVRs, market players are concerned APRA could move to set minimum ratios.
“If it does go down that path, I know there are certainly developers out there and people who have projects underway that are quite nervous,” said David Hancock, managing director at financial planning firm Financial Spectrum.
