APRA tightening another nail in Australia’s housing market coffin

The Australian Prudential Regulatory Authority (APRA) has released its quarterly housing loan exposures, which shows that the percentage of mortgages originated with a debt-to-income (DTI) ratio above six fell to 23.1% over the March quarter, down from the record high 24.3% in the December quarter of 2021:

Hight debt-to-income mortgage lending in Australia

Nevertheless, the result was still way above the 18.9%, 16.3% and 14.8% of mortgages issued at a DTI above six in March 2021, March 2020 and March 2019 respectively.

Given the persistence of high DTI mortgages in Australia, APRA has issued new guidance to Authorised Deposit-taking Institutions (i.e. banks, building societies and credit unions) requesting they rein-in risky mortgage lending:

In a letter to banks yesterday, the Australian Prudential Regulation Authority outlined new requirements, saying lenders would ″⁣need to have systems in place to limit growth in higher risk residential mortgage lending, such as loans at high debt-to-income multiples or high loan-to-valuation ratios″⁣…

“In the current environment, with high household indebtedness and rising interest rates, it’s essential for banks to prudently and proactively manage risks in residential mortgage lending,” Mr Byres said on Tuesday.

The March quarter was also the first full period in which the impact of APRA’s move to increase the mortgage serviceability buffer from 2.5% to 3% was in place.

Other things equal, these moves by APRA will hasten house price falls by removing mortgage demand from the market.

Cheap and easy access to credit lifted Australian house prices by 35% over the pandemic. Now sharply rising mortgage rates and reduced credit availability should have the opposite effect in driving a serious house price correction.

Unconventional Economist

Comments

    • Interest only loans are a ticking time bomb set to go off under conditions like we are facing now.
      Just think, IO repayment will explode as the capital value of the place sinks. If this isn’t an alarm bell for investors to sell I don’t know what is.

      The 2017-18 fall in prices was caused by a restriction in the volume of credit not the price of credit, so investors didn’t see a super strong signal to sell (other than worrying about a declining possible sale price). Now both the price AND quantity of credit will contract. Hold onto your hats.

      • – Disagree. Any family / household that has “a mismatch” between (falling) income and (growing) expenses is vulnerable to defaulting on their debts. Then it doesn’t matter what the type of loan is.

  1. It’s past time to kill off “interest only” lending. I’m fine with keeping it for short term bridging finance but when used in combination with equity mate it is a serious prudential issue that nobody is talking about.

    🔥Burn🔥it🔥down 🔥

  2. How many geared speculators will it take down.
    Example (back of envelope):
    Buy $1M property with 20% down in 2019, $800K loan
    2021 30% increase in value, property is worth $1.3M – withdraw $200K in equity
    2021 Buy $1M property with 20% down, $800K loan
    2022 – Total Asset Value $2.3M, debt $1.6M
    Late 2022 – property decreases by 30%, now asset worth $1.6M = loan amount
    No problems, all is good, breaking even, sort of, had to pay interest at say 3% on $1.6M, for the period $50K, plus stamp duty, depending on state, say 5% of purchase value $100K
    Balance sheet
    Property worth $1.6M
    Debt $1.6
    Transaction costs $150K
    LOSS on paper now.
    2023 property drops another 5%, a further deduction in value of $80K, further $30K in interest.
    Bank calls, need some more capital (cash), don’t have so sell all property
    Sell for $1.52M, selling cost of 2%, $30K, = $1.49M, total holding cost $200K, total debt $1.6M
    Out of pocket $300K, but started with $200K deposit, net loss of $500K
    All in 3-4 years.

  3. It was just an example, the reduction in housing values will be with the speculators that cannot service the debt, as the asset value has decreased, and compounded.
    Mums and dads, couples, singles who purchased a property to live in will get through this somehow.
    A rich man once told me, you are only a drug addict when you can no longer pay for your addiction. Those that are and have been addicted to debt, will soon be debt addicts, no longer able to pay for their perceived high, increase in asset valuations.

      • In a bull market, banks can reduce their spread, due to decreased risk, in a bear market they have to increase their spread to cover rising defaults and increased risk.
        All these things take time to filter down to the economy, delayed response.
        That is why I think inflation is going to be a lot higher than predicted and IR’s will go higher than people believed they could go. While in practise there is a ceiling to IR’s, anything is possible.
        With the RBA past performance does predict future performance, they will increase the IR’s hard and fast, knee jerk reaction, as they should have started to increase them back to normalised rates many years ago.
        Covid was a great big over reaction, that saw way to much liquidity (debt) pumped into an economy by RBA, Feds and Local Govnuts. In reality it just made the 1% richer and the other 99% poorer in the medium to long term, in essence everyone was fooled and it was not based on science, but simply current and past govnuts covering their arses for their inadequacies in not funding the heath care system.
        It is the only reason why we saw property prices sky rocket during a pandemic, pump debt and hope for the best.

  4. Banks manage the withdrawal of credit in down cycles not by adjusting LTI ratios but by instructing valuers to be more cautious.

    Or more particularly the banks put the valuers on notice to be used if they get a valuation materially wrong.

    Post GFC in OZ the banks were suing valuers left right and centre for being too bullish on valuing housing collateral of soured loans

Leave a reply

You must be logged in to post a comment. Log in now