Rising property values could trigger tighter credit conditions

author-avatar By on September 10, 2021
Rising property values could trigger tighter credit conditions

The focus on housing credit policies is becoming more intense as property values continue to rise.

The latest data from the Australian Prudential Regulation Authority (APRA), shows nearly 22% of housing loans originated with a debt-to-income ratio greater than six times through the June quarter. 

This grew six percentage points from 16% a year ago. 

CoreLogic stated this could trigger tighter credit conditions down the track as mortgage debt levels increase faster than their long-term averages. 

The report stated that a sustained period where household debt grows at a faster rate than incomes could see a build-up of medium-term risks that could trigger a tightening of credit policy.

CoreLogic said one response to these medium-term risks would be to raise the minimum interest rate used when assessing whether a borrower can service their loan.

Another option is for portfolio level restrictions to be imposed on lenders, establishing firm benchmarks on the proportion of high debt-to-income ratio loans that can be issued. 

Both options would limit the loan size relative to a borrower's income. 

CoreLogic aren't the only ones cautioning the rapid increase in housing prices. 

Westpac CEO Peter King told the House of Representatives economics committee on Thursday: "When we look at housing affordability at the moment it's pretty stretched."

Mr King told the committee that there is more demand than supply in the housing market but that regulators should wait until lockdowns are finished to assess the market. 

"Will the market slow down itself or not? We might need macro prudential policies," Mr King said. 

However, property analyst Simon Pressley on Thursday was critical of any potential tightening of lending standards.

"One can only hope that the APRA Board does not wish to leave a legacy as economic destroyers and dream-breakers," Mr Pressley said.

"Their track record for considering big-picture consequences is not good."

CoreLogic said that previous rounds of macro-prudential policies saw housing credit harder to come by.

In March 2017, for example, APRA restricted interest-only loans to 30% of new loans.

This follows a 10% annual growth cap placed on investment lending in 2014.

Across the ditch - New Zealand already tightening LVR

Reserve Bank of New Zealand analysis has shown that house prices are above a sustainable level. 

RBNZ, which also acts as prudential regulator, has proposed a further tightening of macro prudential lending standards. 

The latest proposal includes further restricting the number of 80%+ LVR loans to 10% of all new loans to owner occupiers. 

The current restriction is 20% of all new owner occupier lending.

Consultation on the process ends on 17 September, with the new rules coming into effect from 1 October.


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Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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Aaron joined Savings.com.au in 2021. He is a finance journalist with a keen interest in property, the share market, and improving financial literacy in young Australians.

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