Appearance before House of Representatives Standing Committee on Economics Inquiry into Home Ownership, Sydney
6 August 2015
Thank you for the invitation to appear before the Inquiry today.
Our submission to the Inquiry noted the steps APRA has been taking to reinforce sound lending standards in the housing sector.1 As we have noted, these efforts are not targeted at promoting home ownership or housing affordability. Rather, our goal has been to preserve the financial strength of the banking sector, by ensuring authorised deposit-taking institutions (ADIs) are well capitalised and lending on a sound basis, and borrowers are well placed to continue to meet their commitments regardless of changes in the economic environment in future.
It is important to note that APRA’s concerns are not driven solely by housing price growth in the major markets of Sydney and Melbourne. Our objective has been to ensure that in the broader environment of high house prices, high household debt, historically low interest rates and subdued income growth - along with strong competitive pressures within the financial system - sound lending standards are maintained across the board. Thus far, we have not imposed formal regulatory requirements in relation to lending practices: put simply, we have requested banks to take a prudent view of borrower income, ensure they are not underestimating a borrower’s living expenses, and allow for the fact that interest rates will not always be as low as they are today. None of this should be seen as anything other than common sense. Our greater scrutiny has, however, prompted some changes to market practice as more aggressive lending has moderated.
When it comes to the growth of investor lending, we have flagged a benchmark of 10 per cent; above that, ADIs may need additional capital. Actual growth remains marginally above this level, and may well be so for the next few months, but we have seen clear moderation in the previous strong upward trajectory, and the large lenders have all indicated their intention to move within this benchmark. This has generated a range of responses over the past month or so, including, most recently, differential pricing for owner-occupiers and investors.
We’re happy to answer further questions on the impact of our initiatives this morning. In addition, since we made our submission we have also announced another measure that is expected to impact on housing lending dynamics. That is, on 20 July we announced an increase in risk weights for housing loans for those banks that use their own internal models to determine their capital requirements (the major banks and Macquarie Bank). This decision was taken in response to a number of factors:
- competition issues highlighted by the FSI;
- the direction of international work being undertaken by the Basel Committee on Banking Supervision to improve the reliability and comparability of risk models; and
- the desire to strengthen the resilience of ADIs using internal models and, through that, the broader financial system.
In very rough terms, the higher risk weights will require each affected bank to fund each $100 of housing loans with, on average, about $1 extra in shareholders’ funds (and hence $1 less in depositors’ funds or other debt). Given implementation is still 11 months away, it is too early to assess the impact of this change on the housing loan market. However, all other things being equal, the change will reduce the return on equity from housing lending for the affected banks. The extent to which those banks are capable of repricing their business in response will provide an interesting insight into the extent to which the largest banks are subject to competitive pressure from the range of other housing lenders present in the market.
With those opening comments, my colleagues and I would be happy to take your questions.
1 APRA’s submission can be found at http://www.apra.gov.au/Submissions/