Is there a housing bubble and are banks’ lax lending policies contributing to it?

We have all heard the Reserve Bank (RBA) and the Australian Prudential Regulation Authority (APRA) expressing concern about speculative property investment.  In December APRA raised concerns about annual growth in investor loan books above 10 per cent.

According to data just released by APRA, at the end of 2014, there were $1.278 trillion in residential term loans with $839.8 billion in owner occupied loans (65.7 per cent) and $438.9 billion in investor loans (34.3 per cent).

Over the 12 months to December 2014, the value of investor loans has increased 12.2 per cent.

Based on this data many lenders are growing their investment loan segment above APRAs desired 10 per cent.  But are these loans high risk?  Are the banks being too lax with their lending policies?

Smaller lender such as Macquarie, Bankwest and Liberty are now being very aggressive with rates.  These lenders were also synonymous with optimism before the GFC – when the majors really experience competition.  But is it the same now?  Are we operating in an environment of excess?

Certainly, there has been a growth in interest-only loans (now at 36.9 per cent) which indicates that some borrowers could be maxing out their credit.  But, at the same time, the data indicate that the banks are being cautious in their lending policies.  For example:

1.    The amount of lo-doc loans has reduced by 20.2 per cent year-on-year

2.    Year-on-year, the number of loans with an LVR of more than 90% have fallen by 6.9%

The media may well get wrapped up with stories of speculative lending.  But, at a granular level, it seems the banks are adopting increasingly cautious approaches:

  • There is anecdotal evidence that the banks renowned for high LVR lending are declining those applications that do not tick every box.  Accredited Broker understands that much of this is driven by APRA’s scrutiny of banks’ loan books.
  • Banks are adopting caution when assessing a borrower’s ability to repay a loan.  For example, although CBA has reduced its standard variable rate by 0.25 per cent this month, it has only reduced its assessment rate for loans by 0.15 per cent to 7.25 per cent.

It may just be that the headlines are being dominated by Sydney (as this RP Data graph shows) – nothing new there.

Graphs have been extracted from CoreLogi RP Data Blog http://blog.corelogic.com.au/2015/02/interest-investor-lending-continued-increase-end-2014-according-apra/

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