Fears over riskier bank loans
THE big banks are writing more interest-only home loans and a large number with high loan-to-value ratios, amid concerns low interest rates and hot competition is fuelling overheating in some pockets of the property market.
High LVR lending, considered riskier as the loan is more than 80 per cent of the property’s value, made up more than 30 per cent of approvals by the big banks in the June quarter, according to Australian Prudential Regulation Authority data.
The new quarterly paper on the banks’ property exposures released by the authority this week also revealed interest-only lending made up about 40 per cent, slightly above the run-rate of recent years.
JPMorgan analyst Scott Manning said the high LVR lending might come under greater scrutiny, given recent moves in New Zealand to put a ‘‘speed limit’’ on the loans. He said rising house prices ‘‘assisted’’ by the Reserve Bank’s cuts to the official cash rate could add to concerns.
‘‘Whilst this run rate remains in line with historical standards, it may be subject to greater scrutiny given the context of rising house prices domestically, assisted by reductions to the RBA cash rate, and the broader backdrop of macro- prudential policy measures being introduced in the New Zealand market,’’ he said.
In a bid to cool its booming property market, the Reserve Bank of New Zealand last week unveiled rules restricting the banks’ LVR loans above 80 per cent to no more than 15 per cent of new volumes. Commonwealth Bank, Westpac, ANZ and National Australia Bank have subsidiaries in New Zealand and Mr Manning noted the proportion of high LVR lending at some of the banks had been running at double the new limit.
James Freeman, of Deutsche Bank, estimated the speed limit would reduce earnings by up to 0.4 per cent, with ANZ the most affected given its large New Zealand lending book.
While the Reserve Bank is viewed as unlikely to impose similar rules in Australia, given softer credit growth, prominent real estate agents have expressed concern at the ‘‘hot’’ conditions in innercity established housing.
In contrast, residential construction declined 0.1 per cent in the three months to June 30 compared with the previous quarter, to be up 4.3 per cent across the year, according to the Australian Bureau of Statistics. This was despite the RBA cutting rates 225 basis points in the past two years.
Goldman Sachs economist Tom Toohey said the recovery in residential construction remained ‘‘disappointing’’.
The subdued demand for credit compared with before the global financial crisis has spurred a mortgage war among the banks.