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 is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
