Regulator highlights risks as investor and high-LVR loans rise amid 5% deposit scheme extension
Australia’s banking regulator has sounded the alarm over a rise in higher-risk mortgage lending, warning that lender competition and certain government initiatives could undermine the stability of the financial system if left unchecked.
In its latest review of financial system risks, the Australian Prudential Regulation Authority (APRA) noted that, while overall housing lending standards remain sound, there are “signs of higher risk lending picking up".
APRA highlighted a recent uptick in high debt-to-income (DTI) loans, as well as a broader increase in investor participation in new mortgage lending. Investor credit growth has now reached its fastest pace in a decade, raising red flags for regulators and market observers alike.
Investor lending on the rise
The surge in investor activity is particularly notable. In the quarter ending September, investors secured over $40 billion in mortgages, with most of these funds directed towards existing dwellings. Since the Reserve Bank of Australia began lowering interest rates earlier this year, property values in all capital cities have outpaced inflation, fuelling speculation and prompting renewed calls for tighter lending restrictions.
APRA’s own history underscores the risks: between 2014 and 2017, the regulator imposed a 10% annual growth cap on investor loans and a 30% ceiling on interest-only lending to cool the market, as Sydney house prices soared nearly 20% per annum.
With investor borrowing up $10 billion since the latest round of rate cuts, there are growing expectations that APRA may once again deploy macroprudential tools to contain further rises in house prices.
Criticisms on the the 5% Deposit Scheme
Adding to the regulator’s concerns is the expansion of the federal government’s First Home Guarantee (FHG) scheme, which now allows first-home buyers to purchase property with just a 5% deposit.
APRA expects an increase in high LVR loans as a direct result of the expanded scheme, raising the risk profile of new borrowers.
Some in the industry have been vocal in their criticism of the policy.
AMP Bank’s chief economist Shane Oliver described the government’s interventionist housing policies as “totally ridiculous", warning that the scheme will only serve to inflate already sky-high house prices.
With income limits and annual quotas now removed, and house price thresholds significantly lifted, Oliver argues that the scheme will primarily benefit those already in the market, while pushing up prices for everyone else.
Lower requirements could see non-banks take on more risk
APRA’s supervisory engagements have also revealed heightened competition for market share in mortgage lending. The regulator warned that this could tempt lenders – both banks and non-banks – to ease underwriting standards and increase their risk appetite.
In some cases, APRA has observed banks making lending decisions for customer cohorts that are exceptions to their internal policies, further elevating systemic risk. Non-banks could be at the forefront of high-risk lending, taking advantage of lower regulatory requirements to expand their market share.
Regulatory vigilance amid easing conditions
Despite the resilience demonstrated by banks and superannuation funds in APRA’s latest system-wide stress test, the regulator cautioned that this strength is contingent on maintaining strict lending practices, particularly in the mortgage sector.
With mortgage debt identified as a key vulnerability, any loosening of credit standards in pursuit of market share could undermine financial stability if a severe downturn were to occur.
“Housing remains a key vulnerability, given high household debt and prices continuing to rise,” said APRA chair John Lonsdale (pictured right). “We are carefully monitoring these risks and ensuring banks are prepared to implement additional macroprudential tools where required to reinforce lending standards.”
APRA’s warning comes as interest rates fall and competition for home loans intensifies, underscoring the regulator’s sensitivity to mortgage credit quality.
While the economic outlook may be improving, the message from APRA is clear: prudential settings will remain tight, and lenders must resist the temptation to chase growth at the expense of sound risk management.
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