A stark warning yesterday (and an explanation as to why the major bank shares have lost value in the past month or so) from the second most powerful official at the Reserve Bank – risk in housing lending has risen and that’s concerning regulators.
The warning came from the Reserve Bank’s Deputy Governor Dr Phil Lowe in a question and answer session after a speech he made to a financial industry conference in Sydney yesterday.
He warned that a combination of rising property prices, household debt and unemployment have increased the risks in bank mortgage books.
“It is entirely appropriate that households are careful as well because the level of risk there, while I don’t think it is extreme, it has picked up, and both financial institutions and households need to respond to that,” Dr Lowe warned.
His comments come ahead of the June board meeting of the central bank next Tuesday which will not cut rates.
His comments are not the first in this vein from a senior RBA official – Governor Glenn Stevens has made similar remarks on at least two occasions this year – but Dr Lowe’s comments yesterday were far more direct.
“My subjective assessment would be the level of risk in bank mortgage portfolios has risen over the past couple of years," Dr Lowe told the conference.
“Household debt is high, property prices are very high, household income growth is slow, the unemployment rate has drifted up – all those things would suggest there has been an increase in the level of risk, particularly as people have bought property for investment purposes.
“In that environment, it is entirely appropriate APRA (the banking regulator) has a very close dialogue with financial institutions about the risks in those portfolios, and makes sure there are plenty of buffers there in case things don’t turn out so well,” Dr Lowe said.
The Australian Prudential Regulation Authority (APRA) has told banks lending growth to property investors should not exceed 10%. The prudential regulator has also written to their boards encouraging them to review lending practices.
And in the past week the major banks, including Macquarie, have all revealed plans to tighten lending criteria for investors.
Dr Lowe said APRA’s efforts were having an effect on bank lending practices.
"In the past couple of weeks, you have seen a number of banks say they are requiring larger deposits for investor loans and offering smaller discounts on interest rates, smaller rebates and are requiring higher serviceability levels.
"My conversations with a number of banks around the country is the various APRA measures are having an effect,” Dr Lowe said.
Dr Lowe downplayed claims from some ignorant analysts that the authorities, by trying to limit investor lending, was trying to free up room for more rate cuts.
"If it helps us get better balance between monetary policy and prudential policy, that is a side effect. But the primary objective is to make sure the banking system is dealing appropriately with an increase in the level of risk” he said.
But he also said policies targeting banks had their limits and could push more lending outside the banking sector.
"This is an issue very clearly on our radar screen – how far you can push tighter regulation of the banking system without causing the same loans to be made by different financial intermediaries.
"At the moment I don’t think this is really a first order issue…it is very much at the margin. But it is a margin we do have to watch very carefully and history tells us that if you make the incentive too misaligned [between] banks and non-banks, funding will flow to non-banks – and we need to watch it,” he said.
