Tighter lending for investment properties

The Housing Industry Association WA says the Australian Prudential Regulation Authority has introduced sensible changes for residential investment. Picture: Anita McInnes

BUTLER and Yanchep residents soon might notice a change in their bank’s willingness to lend them money to buy a house for investment purposes.

The Australian Prudential Regulation Authority acted this week to initiate extra supervisory measures to reinforce sound residential mortgage lending practices in what it said was an environment of heightened risks.

Last week Yanchep News Online reported in Calls against tighter lending as Butler mortgage crisis unfolds on a report by global ratings agency Standard & Poor’s, which said 5.12 per cent of mortgages in Butler were in arrears.

The report quoted on domain.com.au on Wednesday, March 22 also said in Western Australia the percentage of home loans in arrears had increased by 40 per cent from 1.5 per cent of mortgages in December 2015 to 2.1 per cent a year later.

Some commentators said the action had been taken to clamp down on interest-only loans in a bid to cool the hot east coast property market.

The Australian Prudential Regulation Authority chairman Wayne Byres said together with the Council of Financial Regulators they had closely monitored residential mortgage lending trends and the resulting impacts on the resilience of lenders, as well as the household sector more broadly.

“This increased scrutiny has been in response to an environment of heightened risks, reflected in an environment of high housing prices, high and rising household indebtedness, subdued household income growth, historically low interest rates, and strong competitive pressures,’’ he said.
“The latest measures build on those communicated to authorised deposit-taking institutions  in December 2014 aimed at improving the quality of new mortgage lending generally and moderating the growth of investor lending in particular.
In the high-risk environment the regulation authority has concluded that further steps to address risks that continue to build within the mortgage lending market are appropriate.
Mr Byres said the regulation authority had written to all deposit-taking institutions  advising that them the regulation authority expected them to limit the flow of new interest-only lending to 30 per cent of total new residential mortgage lending.

Within that limitation they were expected to place strict internal limits on the volume of interest-only lending at loan-to-value ratios above 80 per cent and ensure there was strong scrutiny and justification of any instances of interest-only lending at a loan-to-value ratio above 90 per cent.

They were also expected to manage lending to investors in such a manner so as to comfortably remain below the previously advised benchmark of 10 per cent growth and review and ensure that serviceability metrics, including interest rate and net income buffers, were set at appropriate levels for the current conditions.

Finally the authority said they should continue to restrain lending growth in higher risk segments of the portfolio (e.g. high loan-to-income loans, high loan-to-value ratio loans, and loans for very long terms).

Mr Byres said the regulation authority believed the 10 per cent benchmark for growth in lending to investors continued to provide an appropriate constraint in the current environment, balancing the need to continue to moderate new investor lending with the increasing supply of newly completed construction which had to be absorbed in the year ahead.

Housing Industry Association WA executive director John Gelavis said the extra mortgage lending measures announced by the regulation authority provided a cautious and sensible approach to the home lending environment nationally, without imposing restrictions against slower performing markets.

“Housing activity across WA is in a very different cycle compared to the majority of the eastern states, and while house prices have climbed at significant rates in Sydney and Melbourne in particular, prices in Perth have eased somewhat,” he said.

“Equally, rental vacancy rates and rental prices have been moving in different directions and at varying pace across capital and regional centres.

“Tighter lending conditions applied nationally would have a detrimental impact on activity in Perth.

“This is a point HIA has been stressing to the Government, Opposition and regulators over the recent months.

“The banks are well positioned to apply these additional measures and do so with a considered and targeted approach so as not to adversely affect slower housing markets, such as in Western Australia.

After releasing statistics, which showed detached house sales in WA increased by 11.3 per cent in February 2017 following a rise of 12.1 per cent in January (while noting the rates of growth were exaggerated by the extremely low base for detached house sales) the Housing Industry Association said WA had propped up the new home sales market in February.