Bank shareholders should be aware that the country’s two main financial regulators are looking to crack down again on investor lending for housing, especially in the apartment sector.
A week ago it was APRA writing to lenders warning them that their examination last year had thrown up worrying trends in the financing of apartment purchases and development finance for apartment projects.
Yesterday it was the other key regulator, the Reserve Bank of Australia expressing concern that banks are once again loosening lending standards for housing investors.
The new head of the RBA’s Financial Stability Department, Assistant Governor, Michelle Bullock, made it clear the central bank is prepared to move to tighten them unless the banks do so themselves.
Ms Bullock told a Sydney business function that the RBA became concerned about lending in the housing market in 2014, as the proportion of home loans awarded to investors approached 50%, and moved (with APRA and ASIC) to examine home lending activities, developed new regulations and forced a slowdown in lending.
But housing finance data released last Friday for January showed a renewed surge in lending to investors and an easing in finance to owner occupiers, especially first home buyers.
The most recent lending figures show the proportion of home loans taken out by investors has climbed above 50% again, after having at first slipped to 44% in the wake of tighter scrutiny by APRA.
Lending to investors grew 27% in the year to January, well above APRA’s 10% benchmark set in 2015.
In fact real estate investors borrowed $13.8 billion in January, more than the $13.6 billion that was lent to owner occupiers. Of this, only $1.2 billion was lent for building new homes.
Ms Bullock conceded that the effect of these so-called macroprudential regulations imposed on the banks in 2015 to curb investor lending may now be fading.
And she said the RBA and APRA were monitoring developments and were “prepared to do more if needed”.
"Nevertheless, the early experience suggests that, while the resilience of both borrowers and lenders has no doubt improved,the initial effects on credit and some other indicators we use to assess risk may fade over time," she said. "We are continuing to monitor their ongoing effects and are prepared to do more if needed."
She did not provide any details on what form those additional restraints might take or when they would be used. Nr did APRA a week ago today when it wrote to banks and other home lenders expressing growing concern at the growth and terms of commercial apartment lending.
Last week APRA wrote to all lenders revealing it had found worrying gaps and problems in lending and financing of apartment purchases and developments
In its letter to lenders, APRA noted:
- "In current market conditions, it is important that the Boards of ADIs are conscious of the settings for underwriting standards and portfolio controls, and in a position to challenge as appropriate.
- In particular, Boards should actively challenge whether expectations of growth in commercial property lending are achievable, given the position in the credit cycle, without compromising the quality of lending.
- APRA’s review revealed that the ability of the Board and senior management to fully understand and challenge the risk profile of lending has often been hampered by inadequate data, poor monitoring and incomplete portfolio controls. APRA expects ADIs to improve their capabilities in this area, and has written to individual ADIs with specific requirements in these areas."
In an attachment to the letter detailing the problems it found, APRA identified lending too much on investment loans; inadequate considering of loan-to-valuation ratios “in light of recent strong asset growth”, problems with lending to developers, inadequate information on refinancings, problematic standards on presales (and what is a presale), lenders using so-called mezzanine finance and rising property values to allow developers to contribute less “hard’ capital to the financing of a project, and — a major surprise — the way some lenders have ignored the oldest adage in property, ‘location location location’, with APRA saying it was concerned about “potential marketability issues for properties, such as being poorly located, small apartments lacking in amenities and/or suffering from design issues, was not always evidenced in transaction analysis.”
