Unsurprisingly not a great deal of excitement from APRA's review of the mortgage market with no increases in bank capital requirements to be introduced and no caps on specific loan types to be introduced either.
Not that it ever seemed likely.
Of course, APRA is keen to know that new borrowers have the ability to service a lending rate of 7 percent ("floor lending rate") and that they are able to cope with a full 2 percent of on interest rate increases on a loan product.
Economists have been taking a lot of time pontificating on loan assessments in recent months, but since most loans in Australia already comply with these sensible standards (as APRA well knows), APRA sees no cause for extraordinary action.
APRA will quite rightly continue to monitor higher risk mortgage lending and lending practices over the first quarter of 2015.
"At this point in time, APRA does not propose to introduce across-the-board increases in capital requirements, or caps on particular types of loans, to address current risks in the housing sector.
However, APRA has flagged to ADIs that it will be paying particular attention to specific areas of prudential concern. These include:
- higher risk mortgage lending — for example, high loan-to-income loans, high loan-to-valuation (LVR) loans, interest-only loans to owner occupiers, and loans with very long terms;
- strong growth in lending to property investors — portfolio growth materially above a threshold of 10 per cent will be an important risk indicator for APRA supervisors in considering the need for further action;
- loan affordability tests for new borrowers — in APRA’s view, these should incorporate an interest rate buffer of at least 2 per cent above the loan product rate, and a floor lending rate of at least 7 per cent, when assessing borrowers’ ability to service their loans. Good practice would be to maintain a buffer and floor rate comfortably above these levels.
In the first quarter of 2015, APRA supervisors will be reviewing ADIs’ lending practices and, where an ADI is not maintaining a prudent approach, may institute further supervisory action.
This could include increases in the level of capital that those individual ADIs are required to hold.
APRA Chairman Wayne Byres noted that while in many cases ADIs already operate in line with these expectations, the steps announced today will help guard against a relaxation of lending standards and, where relevant, prompt some ADIs to adopt a more prudent approach in the current environment."
There hasn't really be any indication (that I've seen anyway) that much more than this was ever on the cards.
However. this does take on an additional level of relevance since interest rate forecasters are finally dropping like flies. Better late than never!
NAB have been the latest to flip-flop, now predicting a twin salvo of interest rate cuts in 2015.
Many including now a Westpac expect that we could see cuts as early as February and March, providing yet further relief to existing homeowners, who in aggregate are already a long way ahead on their mortgage repayments.
Housing Finance - Data Incoming
We analysed the last round of Housing Finance data for the month of September 2014 here.
The next round of Housing Finance data will be released tomorrow so stay tuned for further analysis thereof.
In particular keep an eye out for what happens to investor loans, since it is this category of lending that APRA will be most interested in.