Bill Evans at Westpac:
…the loan approvals to investors account for around 32% of the total housing loans (including all owner occupiers) compared to 65% in 2017 when APRA introduced a range of controls aimed at curtailing investor activity.
On the other hand the Bank points out the solid starting point that will support the resilience of the system to the potential “increased risk-taking by optimistic borrowers”. It highlights the improved quality of household balance sheets in the wake of higher house prices (“the share of loans for which the value of the loan exceeds the value of the property has fallen to around 1.25% down from 3% a year ago”). Household balance sheets also remain in good shape from the perspective of repayment buffers (“Around half of all mortgages have prepayment buffers equivalent to more than 3 months’ worth of repayments and,
for more than one-quarter of loans the buffer exceeds 2 years’ worth of repayments” while “the share of loans with prepayment buffers of only one month … remains close to its pre pandemic level of 40%” and “most loans with low prepayments do not represent large risks to lenders”). Around two thirds of those with low prepayment buffers are held by investors and/or fixed rate borrowers with the remaining group of relatively ‘risky’ borrowers having declined to around 10% of all loans from 15% a year ago.
Other specific risks have also eased. In particular, housing loans on prepayment deferrals have declined to 0.7% of all housing loans from a peak of 11% in May 2020.
House price movements to date are also put into perspective – Sydney and Melbourne prices are now a little above their historical peaks in 2017/18, having risen by 5% over the year compared to the 11% increase in regional areas.
Westpac has forecast national dwelling prices to rise by around 20% over the course of 2021 and 2022. That would put Sydney and Melbourne prices 12–15% above their 2017 peaks by end 2022 – an annual rate of increase of 2–3% – hardly worthy of being described in the emotional vernacular as a ‘bubble’.
While the FSR sketches out the risks to the economy of lending excesses associated with rising house prices, current observations point to lenders remaining well disciplined while, at the same time, household balance sheets have strengthened.
The overall impression from the Review is that authorities are some way from seeing the need to adopt any direct controls on lenders to address risks associated with rising house prices.
Westpac continues to expect no significant containment measures in 2021.
The FSR also highlights risks around the outlook for business insolvencies and commercial property.
1. Business insolvencies
Businesses in the arts and recreation, accommodation and food, and transport sectors have continued to receive significant support from the government. Firms in these sectors also tend to be more highly geared and have low levels of liquidity.
The highest risks in these areas are around SMEs (although the share of SMEs with deferred repayments has fallen to just over 1%).
Notwithstanding this, the Review expects insolvencies to rise further for some months although some factors are likely to help moderate the rise – cash supports that allowed businesses to wind down operations without entering into insolvency.
Changes to the insolvency framework and the recently announced SME Recovery Loan Scheme are expected to assist SMEs.
2. Commercial Property – Offices
The FSR notes: “impairment rates on commercial property remain low, consistent with relatively low LVRs and strong debt covenants”.
However these impairments are expected to rise in the CBD office markets where vacancy rates in Sydney and Melbourne have reached 20 year highs.
The low number of sales transactions increases the uncertainty about recent price trends.
3. Commercial Property – Retail
Rents and valuations have declined by 6 and 15% respectively since 2019 – particularly challenged by the rise of online shopping. However the dominance of the large real estate investment trusts in this sector significantly reduces contagion risks. Nearly all REIT securities are held by institutions. They entered the pandemic in good financial health with low gearing and were well-placed to absorb the earnings reductions from rent waivers.
