Major mortgage regulatory reform appears to be over, after the banking regulator revealed “the heavy lifting on lending standards has largely been done”.
APRA chairman Wayne Byres said that while it was too early to declare victory, banks had improved their lending standards and reduced their volume of higher-risk home loans.
“While there is more ‘good housekeeping’ to do, the heavy lifting on lending standards has largely been done,” he said.
“Any tightening from here on is expected to be at the margin as banks seek to get a better handle on borrower expenses and better visibility of borrower debt commitments.”
Harder to qualify for a home loan
Mr Byres, in his speech to the Australian Business Economists, described three ways in which higher-risk lending had fallen:
- A reduction in high-LVR lending, both to owner-occupiers and investors
- A slowdown in lending to investors
- A big drop in interest-only lending, particularly with high LVRs and long terms
At the same time, mortgage lenders have become more rigorous in assessing the ability of borrowers to service and repay loans, according to Mr Byres.
“Together with the benchmarks we set on investor loan growth and interest-only lending, which eased unhealthy competitive pressures, the heightened scrutiny applied to serviceability has produced a clear improvement in the quality of new lending,” he said.
Mortgage market down but definitely not out
Mr Byres said it was hard to tell to what extent APRA’s regulatory activity had impacted the flow of lending, but that two observations could be made:
- A lot of home loans are still being written
- Owner-occupiers are gaining market share
Housing lending grew by about 6 per cent in the year to May 2018, which was only marginally below long-run averages, according to Mr Byres.
“Credit growth appears to be slowing somewhat at the moment, but that is not surprising in an environment of softening house prices and rising interest rates,” he said.
Mr Byres also noted the “relatively high rate of rate of growth” for owner-occupiers.
“Lending to investors is certainly now growing more slowly compared to three or four years ago,” he said.
“But despite the tightening in lending standards – which, it’s important to remember, also apply to owner-occupiers – lending to owner-occupiers grew at a very healthy 8 per cent over the past year.”