Cheap home loans, not yet risky
Interest-only loan structures have generally been more popular among investors, who are entitled to tax deductions on their interest payments.
As investors remain at record levels as a percentage of total loans, the risk to financial stability of interest-only loans in this segment of the market remains low.
A key area that regulators are likely to monitor is the proportion of interest-only loans to homeowners.
The number of interest-only loans to homeowners increased 32.5% in the September quarter and included a high streak of 45.7% of interest-only loan issuance.
A sustained increase in the number of homeowners not repaying their loan principal could put upward pressure on household debt levels, creating stability risks when interest rates eventually rise.
The share of new home loans issued on a loan-to-income ratio of six times or more reached 7.0% of loans in the December 2020 quarter.
It is the highest in the series, which starts from March 2019.
Loans issued with a debt-to-income ratio of six or more accounted for 17.2 percent of mortgages issued in the quarter, which was also a high streak.
APRA did not express concern about this measure in its report, arguing that the debt-to-income share was “at its historical average.”
Increased demand in the Sydney and Melbourne real estate markets, as seen now, will test debt-to-income ratios.
Indeed, the house price-to-income ratio in Sydney has averaged around 8.5 since 2013 and 7.5 on average in Melbourne since 2015.
As house prices rise at a time when incomes are expected to remain relatively stable, it is possible that loan-to-income and debt-to-income ratios will rise further, which should be viewed as a riskier outcome by regulators. .
The proportion of loans from high loan-to-value ratios (LVRs) has also increased for homeowners and investors.
The share of new home loans with a loan-to-value ratio of 80% or more increased to 42.0% for all borrowers in the December 2020 quarter, from 39.9% in the previous quarter to be the highest. highest proportion on save.
The jump was greatest in the homeowner space, where 45.7% of loans were from LVR greater than or equal to 80% and 14.1% of loans were greater than or equal to 90%.
The regulator argued that this increase reflects greater participation of owner-occupiers in the market, especially first-time buyers.
First-time homebuyers can access housing through loan guarantors, or even the first-time mortgage bond system, which has reduced the risk of low deposit home loans.
The latest data from APRA indicates that there is no explosion in risk in mortgages, despite the recent surge in house prices in Australia.
The publication follows a recent address by RBA Governor Phillip Lowe, who reiterated the strategy of keeping the cash rate low for years to come, which should continue to support housing demand.
But a deterioration in lending standards can be mitigated, as we have seen before.
This could be achieved by tightening utility appraisal rates, loan amounts to income or debt (LTI or DTI ratios) or loan amounts to home appraisals (LVRs).
In a recent statement, the Board of Financial Regulators reiterated that while lending standards are generally maintained at this point, they have answers up their sleeves if loan terms become risky.
While APRA’s December quarter statistics show a trend toward “riskier” lending styles, the scale is probably not large enough to trigger a regulatory response; but if this trend continues or even accelerates, it becomes more likely that we will see regulatory intervention aimed at limiting financial stability risks associated with the housing sector.