Risks rising for APRA lending restrictions

Investor credit growth has started to rise, so too interest-only loans and the share of high LTV ratios, says the chief economist at Jarden

In Australia the chief economist at Jarden, one of the country’s newest and fastest-growing advisory houses, Carlos Cacho says the five key risks that the Australian Prudential Regulation Authority (APRA) steps up its restrictions on lending over have started to rise.

Mr Cacho notes investor credit growth has started to rise, so too interest-only loans and the share of high loan-to-value (LTV) ratios such as more than 80 per cent leverage.

He also says that the share of very high loan-to-income lending – of more than six times income – has started to rise, as well as the share of very high debt-to-income lending.

While all these categories of higher risk lending are increasing, we think they remain below levels which would concern APRA enough to take action – so far, Mr Cacho said. What could see the (RBA) and APRA step in? A deterioration in lending standards and/or rapid growth in high risk lending would likely be required to see intervention.

Behind closed doors, it’s understood that the Reserve Bank is against taking up the macroprudential tools that New Zealand’s central bank has moved towards.

Instead, APRA will be centre stage and its options come down to two main tools.

Limits on higher loan to value ratio lending are arguably the most conventional choice, given they have already been used in Canada, NZ, Singapore and Sweden, Mr Cacho said.

LTV lending has increased since 2018, with the share of very high loan-to-value loans (more than 90 per cent) rising 2 per cent since 2019.

However, this would go against the government’s own First Home loan Deposit Scheme which specifically facilitates higher loan-to-value lending, Mr Cacho said. As such, we think the most likely option would be a limit on very high (more than six times) debt-to-income lending, perhaps limiting them to 20 per cent of new loans.

So far in Australia debt-to-income levels have increased from 15 per cent to 17 per cent and Mr Cacho thinks APRA would likely become concerned if this level approached 20 per cent.

Limits on the share of higher loan to income lending have also been used in the UK and Ireland, and APRA has previously directed ADIs to ‘develop internal portfolio limits on the proportion of new lending at very high levels’, he said.

The share of high loan to income loans has risen from 5 per cent to 7 per cent in two years, but it remains below the 10 per cent share prior to 2017.

So far economists don’t see the need for intervention despite making forecasts for 20 per cent house price growth in the next two years.

We expect a fully-fledged boom to develop in 2021 and carry into 2022, Westpac’s Bill Evans said. Westpac has lifted its forecast for dwelling prices with 10 per cent gains now expected in both 2021 and 2022.