RBA to stress-test banks amid mort­gage fears


The Re­serve Bank has re­vealed deep con­cerns about the prop­erty mar­ket, warn­ing that in­tere­stonly bor­row­ers are vul­ner­a­ble to “pay­ment shock” and that many house­holds could be forced to dump their homes on the mar­ket.

In a stark ad­mis­sion of the height­ened threat to fi­nan­cial sta­bil­ity amid ever ris­ing house­hold debt and high prop­erty prices, the RBA will launch “top-down stress tests” of the bank­ing sys­tem, which will be car­ried out on top of the su­per­vi­sion from the Aus­tralian Pru­den­tial Reg­u­la­tion Author­ity, rais­ing the prospect that fur­ther reg­u­la­tory ac­tion will be taken against still ram­pant lend­ing from the bank­ing sec­tor.

The warn­ing came as Citi an­a­lyst Craig Wil­liams sug­gested in­ter­est-only mort­gages could be the coun­try’s Achilles heel. The Citi re­port warns of the risk pre­sented by Aus­tralia’s re­liance on in­ter­est- only loans, which ac­count for more than a third of all mort­gages.

The stress tests add an­other layer of scru­tiny on the bank­ing sys­tem, as con­cerns rise about the re­silience of bor­row­ers to higher in­ter­est rates and jumps in un­em­ploy­ment.

Banks are be­ing in­ves­ti­gated by the cor­po­rate watch­dog for pos­si­ble breaches of re­spon­si­ble lend­ing laws when in­ter­est-only loans

are sold to cus­tomers. In­vest­ment bank UBS has found that onethird of in­ter­est-only bor­row­ers are un­aware they are not pay­ing off their mort­gage.

Yes­ter­day’s re­lease of the RBA’s Fi­nan­cial Sta­bil­ity Re­view is the first since APRA’s an­nounce­ment in March re­quir­ing banks to limit the sale of in­tere­stonly loans, which don’t re­quire any pay­ment on prin­ci­pal for a pe­riod of about five years.

The RBA said that, since lim­it­ing in­ter­est-only loans to 30 per cent of lend­ing, hous­ing mar­kets in some ar­eas — such as Bris­bane, Syd­ney and Mel­bourne — had cooled. The cen­tral bank said tighter rules and higher in­ter­est rates for in­ter­est-only loans were con­strain­ing house­holds and de­vel­op­ers, although there were few is­sues with set­tle­ments so far.

The RBA out­lined sev­eral con­cerns with the high rate of in­tere­stonly bor­row­ers in the mar­ket. It said th­ese house­holds re­mained more in­debted through­out the life of the loan than other bor­row­ers, mak­ing them “more vul­ner­a­ble to higher in­ter­est rates, re­duced in­come, or low­er­ing house prices”.

“Such house­holds are also more vul­ner­a­ble to ‘pay­ment shock’ due to the in­crease in re­pay­ments fol­low­ing the end of the in­ter­est-only pe­riod of the loan,” the cen­tral bank said.

Re­cent reg­u­la­tory overhauls to shore up re­spon­si­ble lend­ing laws mean in­vestors must now have a clear debt re­pay­ment plan when ap­ply­ing for a loan.

“For many pre­vail­ing in­tere­stonly bor­row­ers this does not ex­ist,” Mr Wil­liams said. “The large lev­els of debt out­stand­ing by bor­row­ers aged in their 50s and 60s means many in­vestors will need to sell prop­erty to dis­charge their debts.”

The RBA said the “key risks” in the lo­cal fi­nan­cial sys­tem stemmed from house­hold bor­row­ing. House­hold debt has con­tin- ued to climb amid record-low in­ter­est rates, re­cently touch­ing a debt-to-in­come ra­tio of 194 per cent — one of the high­est in the world. “Higher in­ter­est rates, or falls in in­come, could see some highly in­debted house­holds strug­gle to ser­vice their debt and so cur­tail their spend­ing,” the RBA said.

Mort­gage buf­fers where house­holds were well ahead of their re­pay­ments “mask sub­stan­tial vari­a­tion” in the mar­ket, with onethird of all bor­row­ers less than one month ahead on their loan.

The num­ber of in­vestors who own mul­ti­ple prop­er­ties has also been ex­plod­ing, with the num­ber of in­vestors own­ing five prop­er­ties grow­ing by 7.5 per cent in a sin­gle year. Ten per cent of in­vestors own more than two prop­er­ties.

“The strong growth of in­vestor bor­row­ing for prop­erty in re­cent years has po­ten­tial im­pli­ca­tions for fi­nan­cial and macroe­co­nomic sta­bil­ity,” the RBA said. “Many in­vestors are lower-to-mid­dlein­come earn­ers with a sub­stan­tial share of house­holds in low­er­in­come oc­cu­pa­tions ex­pe­ri­enc­ing losses on their ren­tal prop­er­ties.”

Mr Wil­liams said an­other threat of in­ter­est-only lend­ing was that it was skewed to­wards older co­horts of bor­row­ers who were tak­ing ad­van­tage of tax breaks such as neg­a­tive gear­ing and cap­i­tal gains dis­counts. Many owne­roc­cu­piers had re­lied on in­ter­est- only loans to ac­cess the mar­ket amid surg­ing house prices. The loan type al­lows a bor­rower to ac­cess larger loans.

Cit­ing re­search from Dig­i­tal Fi­nance An­a­lyt­ics prin­ci­ple Martin North, Mr Wil­liams said one-third of se­nior prop­erty in­vestors did not have a loan re­pay­ment plan, while an­other third were never asked about plans to re­pay their loan on their mort­gage ap­pli­ca­tion. “As th­ese co­horts be­gin to hit retirement age, their in­vest­ment prop­er­ties will need to be sold to re­pay the debt,” Mr Wil­liams said. A re­cent UBS re­port found one-third of all bor­row­ers had given false in­for­ma­tion to a bank or bro­ker to ob­tain a loan.

Brian Harzter, chief ex­ec­u­tive of West­pac — the na­tion’s largest lender to in­vestors with more than $200 bil­lion worth of in­ter­est-only loans on its books — this week told par­lia­ment that in­ter­est-only loans were “not a giant credit is­sue” and that the RBA was more con­cerned with a squeeze on in­comes in the event of higher rates.

“I have per­son­ally spo­ken to the gover­nor of the Re­serve Bank, who has con­firmed to me that the Re­serve Bank’s con­cern is not about the credit qual­ity of the Aus­tralian banks; it’s a con­cern about the eco­nomic re­silience of the na­tion in the event that in­ter­est rates rise,” Mr Harzter said.

Mr North be­lieves there are al­most 2 mil­lion in­vest­ment prop­er­ties across Aus­tralia that will come un­der “sell­ing pres­sure” in com­ing years, which could be ex­ac­er­bated if house prices fall and en­cour­age in­vestors to sell out of the houses.

The RBA said “sub­stan­tial ad­di­tions” to the num­ber of apart­ments in places such as Bris­bane and Mel­bourne had al­ready caused prices to fall.

The cen­tral bank’s new stress test will in­ves­ti­gate what hap­pens to banks amid a sys­tem-wide eco­nomic shock. It will fill the gaps in APRA’s cur­rent stress tests by find­ing out how shocks “prop­a­gate” through a bank’s bal­ance sheet, and the re­sults will be fea­tured in fu­ture RBA pub­li­ca­tions.

JPMor­gan an­a­lyst Ben Jar­man said the RBA’s com­ments on in­vestor lend­ing con­veyed “a sense of dis­sat­is­fac­tion that not enough has yet been done to rein in ac­tiv­ity”. On Thurs­day, of­fi­cial fig­ures show in­vestor lend­ing hit its high­est rate in two years.

“The in­tro­duc­tion of this top­down test is a some­what un­usual de­vel­op­ment, given the sep­a­ra­tion of pow­ers between the RBA and APRA,” Mr Jar­man said.

“It is not hard to imag­ine such sim­u­la­tions be­ing used to sup­port the ar­gu­ment that macro­pru­den­tial pol­icy can be tight­ened fur­ther.”


West­pac CEO Brian Hartzer says in­ter­est-only loans are not ‘a giant credit is­sue’

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