UBS: High risk mortgages overheating, macroprudential next

Via George Tharenou at UBS:

Higher risk home loans up significantly in Q4 across DTI, LVR and IO shares

We previously argued that macroprudential policy tightening by regulators (via the CFR, which includes APRA and the RBA) is just a matter of timing (& is instead of rate hikes). Indeed, the CFR said they are watching housing and “will continue to closely monitor developments”, but added “and consider possible responses should lending standard deteriorate and financial risks increase”. Furthermore, RBA Governor Lowe added they are “watching carefully” for changes in lending standards. We assess today’s data on home loans as showing a significant q/q increase in ‘higher risk’ home loans in Q4-20. Given the further pick-up of home loans and prices in Q1, this trend of a rising share of high risk loans likely accelerated further more recently. Specifically, in Q4, the share of new home loans with a ‘high’ Debt-To-Income (DTI) ratio ≥4 lifted to a ~record high of 59.3% (from 57.7%); which included ‘very high’ DTI ≥6x up to a record high of 16.9% (from 16.0%). Similarly, ‘high’ LVR loans ≥80% spiked to a ~record high of 42.0% (from 39.9%). The interest rate paid on home loans ticked down to <3%, but the assessment rate dropped to 5.5%, and Banks report a further large decline in Q1 towards 5%. This is very sharply increasing borrowing capacity, and seeing a large rise in average loan size. We estimate a return to an interest floor rate of closer to 6% may be considered as more prudent, and would reduce borrowing capacity by 10-15%. Such a change would take a lot of heat out of the housing market. Interest-only home loans picked up to a 19.3% share (from 18.7%), the highest ratio since Q2-19, albeit still well below the prior 30% ‘cap’, and further below the prior cycle peak of >40%. Finally, the share of loans approved outside serviceability fell back further to a low 3.2%; but more likely reflects an easing of the serviceability policies (i.e. meaning a lower share were ‘outside criteria’), rather than a tightening of lending standards.

RBA minutes argue lending standards remain sound; data may challenge ahead

The RBA’s March meeting minutes argued that “lending standards remained sound and that it was important that they remain so in an environment of rising housing prices and low interest rates. The Board concluded that there were greater benefits for financial stability from a stronger economy, while acknowledging the importance of closely monitoring risks in asset markets”. We think that a further increase in higher risk home loans ahead would challenge this RBA view. However, we think the timing of macroprudential tightening is probably still only later in the year – with data needed to assess the impact the end of JobKeeper and housing (eg HomeBuilder) stimulus.

I still don’t see macroprudential this year. And, given I see terms of trade shock coming next, things will get quite complicated for mortgage tightening in 2022. Don’t forget, the last time that the iron ore price crashed, Australia managed through it by ramping up mortgages!

David Llewellyn-Smith
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Comments

  1. Goldstandard1MEMBER

    You are already starting to call a few peaks even after all this stimulus including iron ore, Aus$ and as we know interest rates are already as low as it takes to make a difference. Eventually there won’t be a lever to pull as you have pointed out.

    I thought it worth clarifying a couple of things which are some anwers/views to various comments in some other threads:

    The commentators/subscribers/free loaders on here who believe a reckoning is coming soon, are simply sick of saying why-I’m one of them and Bnich would be another amoungst MANY others. Some have capitualted, some have simply turned into observers and that’s ok.
    That is why there are no ‘fiery’ comment every time there is a ‘boom’ article-why copy and paste? Just because the market didn’t bust this month (again) due to kitchen sink policy doesn’t mean it was the wrong decision NOT to buy in the last 12 months especially if buying a family home to live in. A medium to long term view is still firmly staying away from the FOMO with everything going on.

    Regarding the comments around houses listing and selling quickly for stupid prices……..it is true but that is just HALF the story as there is not much stock, and if the market is as HOT as the industry keeps telling us, why not hold out for longer and get even more higher crazy offers? I’ll tell you why:
    Most sellers (and I know many as well as their agents who are struggling to put keep their business running due to lack of listings) know this is a WINDOW of opportunity. It gets worse from here as stimulus dries up, credit tightens and the real annemic economy reveals itself – many will be blind-sided which is what FOMO does I guess. It’s all quite simple if you read from various sources, understand the unwind is already happening and don’t get FOMO.

    My personal opinion is summarised by the following analogy – The under ocean earthquake has hit, we’ve seen the water receed and the bulls/FHO are building property on the new ‘reclaimed land’, whilst others are moving, at least teporarilly, to higher ground….

    Ultimately the individual must make the decision that is right for their circumstances, and the answer won’t but in a fiery rebuttal on this forum.

    • If site owners don’t like free members they should enact a hard paywall. Freemium models are freemium models for a reason.

      Yes I let my sub lapse. Value proposition isn’t clear compared to say Michael west, Kayo, GCN etx

      • Goldstandard1MEMBER

        Hey Swampy, my comments are general in nature and and not subscription financial advice. Readers should evaluate their own personal situation and if needed, seek a financial advisor as to whether free content is helping them and if it is, assign a monetary value to that value in the form of a subscription.
        🙂

      • I think out of courtesy you should pay your membership if you want to comment
        Although I read early in the year, I paid before writing comments again
        Think that’s decent thing to do

    • I have always been a proponent of the debt cycle.

      When they ease debt servicing burdens/lending standards, new credit is able to pour into the sector and drive house prices up for another cycle.

      That happened. The RBA used the last of its pitiful rate cuts, but more importantly, it undertook TFF and YCC to drive down mortgage rates.

      I don’t even look at CoreLogic, I just look at what housing loan commitments are doing. We are undeniably in another up cycle. Who knows what happens in a year or 2, as the debt capacity of the household sector begins to drag again.

      • Best not to look at CoreLogic as I just did and the daily index is up 0.24 today. Only a 49% increase for the annualizers.

    • “In the long run we are all dead”, timeline to destruction or it didn’t happen. Most commentators just, rationally, got sick of waiting after what is it now 10-11 years if the same analysis. So did this site’s authors seemingly.

      • It’s interesting
        I had the last 2 people left who I told not to buy a home yet ….. they weren’t in a position to buy anyway but one has just bought a town house off the plan in Brisbane and the other my young nephew, I said don’t rush and my cousin just told me he had bought a block of land home package about 50km outer suburbs in Sydney way out past cherrybrook I think it’s called

        There isn’t a person that isn’t Long mortgage debt

    • SnappedUpSavvyMEMBER

      Great analogy, business conditions are starting to fade right now, I can see pain after Easter and a reality check

      • Yes there will be pain in the economy after Easter but it won’t show in the markets until a bit later
        Once this housing circus slows down around mid year it will become much more obvious
        But I can imagine many small businesses will really feel the end of job keeper, wage subsidy

    • Mike Herman TroutMEMBER

      Thanks for posting. I’ve been patiently waiting for the reckoning for a long while now. I almost capitulated a few weeks ago too, many people on here had moved to join the property buying, a family member upgraded at 1.7% over 4 years. I made the call to the mortgage broker and sent him my financials. Knew where I wanted to buy. Had been watching for a while.

      But…. something in me said no. Hold off. I look around and this FOMO continues to lack longer term sense to me. It’s been hard to sit on my hands. Rent is about the same as a mortgage. There is a fear that if I don’t move now I’ll miss out. Maybe I’m wrong but my conviction says now is not the time. I’ve also come to terms with my decision over the past few weeks. I accept it now. I like reading you and BC because it gives me the courage to stay true to my own convictions. Maybe we are wrong. But this period smacks of this time is different and my gut says no it’s not in the most important of ways. This is classic frenzy at the top stuff in my humble opinion…

    • innocent bystander

      I would agree with that.
      timing is the thing.
      One thing I have learnt is there are markets within markets and aggregates can disguise that.
      One of the markets I watch is in a bushfire zone and a lot of the sellers are older demographic who see it as a window to get out – not because of the fire threat but because big bush blocks require a lot of maintenance and that gets more difficult as you get older. The buyers appear from the ‘burbs who don’t get the local environment threat/maintenance issues. For eg a lot of land has sold recently that has been on the market for years – I suspect the buyers have no idea of the costs/regs in building in a bushfire zone. I also suspect a lot of the buyers have the its-covid-lets-get-out-of-town and run-for-the-hills vibe happening.

      More generally speaking the cheap money has brought out the FHB who have saved their overseas spend and now find one way or another they have a deposit.

      Being Perth I also suspect most of the market prices will be up the escalator and down the stairs – like previous times.

  2. House up the street adjacent an old dip site in a small regional village that’s becoming more gentrified / you gt cashed up buyers just had an off market off 990k. Flat site pool 4 bedder I think 1300sqm. Agent (mate who sold our place) said on market well over a mill

    Northern Rivers has been well hot for ages now

  3. So if bond yields fall, let’s see if they lower fixed rates again

    I spoke to a mortgage broker yesterday, they told me, you still have to pay 2 + % on variable but fixed rates have really come down

    Why did they drop home loan fixed rates again to 1.80s again

    Did they really need to do that ?

    Why don’t they leave cash rate but RBA force the banks to raise home loan rates just a little to scare people a bit

    • The bank obviously have a promise from the RBA that they will support long term fixed mortgage rates via the TFF. Variable the punter takes there chances.

    • But isnt the aussie doing the same? See comment above about how it’s 49% annualised etc. It’ll probably resemble the same if you charted ours. Melt up melt up.

  4. happy valleyMEMBER

    “The RBA’s March meeting minutes argued that “lending standards remained sound … ”

    How would the RBA know? Does it check anything or does it rely on whatever plod APRA gets fed by the banks?