Borrowers should brace for possible repayment shocks and negative equity, regulator warns
The Australian Prudential Regulation Authority has warned that the country is entering a “very different” housing environment than it saw during the last decade, with borrowers looking at possible repayment shocks and negative equity as ultra-low fixed rates expire.
APRA chairman Wayne Byres said at a recent conference that dollar losses from housing portfolios now regularly exceed those from other portfolios in the regulator’s stress tests, according to The Australian.
“Of course, that can simply be a product of the calibration of the stress test itself, but more intuitively it reflects the combination of a growing proportion of housing loans in the total book, and rising risks within those portfolios from a larger share of more heavily indebted borrowers,” Byres said.
Housing loans account for more than 60% of the banking industry’s total loan portfolio, The Australian reported. Housing portfolios have traditionally been low-risk, with most large credit losses coming from areas such as commercial property and corporate lending.
Now, however, many mortgage borrowers are likely to feel the squeeze of skyrocketing inflation and rising interest rates. Byres said that pockets of stress were likely – especially if interest rates rise quickly and home prices drop.
He said that in recent years, APRA has been “increasingly exercised” – to the point of occasional intervention – about the quality of home lending, and its proposed new macroprudential framework focused on measures to constrain housing-related risk.
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“Of particular note will be residential mortgage borrowers who took advantage of very low fixed rates over the past couple of years, and may face a sizeable repayment shock – possibly compounded by negative equity – when they need to refinance in the next year or two,” Byres said. “We will also be watching closely the experience of borrowers who have borrowed at high multiples of their income – a cohort that has grown notably over the past year. Interestingly, this growth has not been an industry-wide development, but rather has been concentrated in just a few banks. We therefore opted to tackle our concerns on a bank-by-bank basis, rather than opt for any form of macroprudential response.”
Lending policy changes are expected at these banks, according to The Australian. Those changes, coupled with rising interest rates, are projected to moderate the level of high debt-to-income borrowing.
Byres said that the banking industry was “well placed” overall to handle the more difficult lending environment, and any deterioration in housing loan portfolios was not expected to cause issues with system stability.
