The Sydney Morning Herald – 23 October 2014
By Gareth Hutchens, James Eyers and Misa Han
Australia’s financial regulator has completed a “comprehensive” stress test of the biggest banks and believes lending standards are being stretched because major banks are competing aggressively on home loans.
Wayne Byres, the new chairman of the Australian Prudential Regulation Authority, told a Senate estimates committee on Wednesday that the stress test was focused on a “significant housing downturn”, and comes after the Reserve Bank expressed concern about imbalances between the number of investors and owner-occupiers and the impact that imbalance was having on house prices.
“We’ve just completed a comprehensive stress test of the largest lenders, which was focused amongst other things on a significant housing downturn,” Mr Byres told the committee.
“I don’t think there’s any issue that it is a competitive marketplace. Lending standards are being stretched.”
It comes as Commonwealth Bank chief executive Ian Narev urged governments to take the pressure off house prices by using infrastructure projects to increase the supply of housing stock.
“The appropriate development of infrastructure, particularly roads and transport, will open up new opportunities to develop residential living and therefore create more supply in the market, which gets the overall property market to a good long-term equilibrium,” Mr Narev said on Wednesday.
CBA said at its full-year results in August that a new supply of houses, as builders respond to rising property prices, would act as a “natural correction mechanism” to temper future house price rises.
But Mr Byres said APRA had been monitoring the state of high-serviceability ratios, and high loan-to-value ratios, and it may need to “turn the dial up” a little bit to keep lending practices within reasonable bounds.
With the Reserve Bank of Australia keeping the cash rate at a historic low of 2.5 per cent for the 14th month in a row earlier this month, Mr Narev said house price rises were an inevitable consequence of historic low rates and “we all need to be careful in these sorts of environments”. But in a view in line with the RBA and Australian Prudential Regulation Authority, Mr Narev said limiting low deposit loans via caps on loan to value ratios was not an appropriate policy response.
At CBA, the average loan-to-value ratio is 48 per cent, he said, compared with the low 20 per cent over the whole economy and a figure in the 60s when mortgages are originated. It is also important to remember that banks in Australia had full recourse to other assets, which reduced the incidents of default, he said.
“This idea that if property prices dip 10 per cent suddenly everything is underwater and even if it is people will walk away from houses isn’t right. The key question is can people service the debt. And the key question there is do they have a job. The number one thing we look is the trend on the unemployment rate.”
After RBA deputy governor Philip Lowe warned in a speech on Tuesday to the same CBA conference about property investors taking on risks when prices are already high, Mr Narev said by talking about the risks in the housing market, Mr Lowe “is already exercising macroprudential tools – which is making people aware of it.”
Mr Byres said APRA was not concerned with targeting a certain level of house prices.
Rather, if the financial regulator decided to introduce any macro-prudential tools to target the housing market then he would be doing so to ensure the stability of the financial system.
He also said any move potential move on housing macro-prudential management would focus on capital requirements for banks.
Mr Byres said APRA had not yet given any advice to Treasurer Joe Hockey because no decision had been made about whether the regulator would make a move or not.