Risky
Risky? It’s OK for the moment, says APRA. Image – Canva.
  • More home lending than ever has been recorded, up to $28.8B in January
  • Not a cause for concern, as debt to equity and loan to value is still fine
  • If these risk ratios continue to rise, or accelerate, then action may be taken

With cheap money available, and a booming property market, some commentators are already becoming nervous about how (badly?) this may end.

Despite rapidly rising property values, recent data from the Australian Prudential Regulation Authority (APRA) suggests that there is no “material relaxation in lending standards.”

Echoing the words of the Reserve Bank’s Phil Lowe, this is code for: ‘Lending is OK for the moment, has not got out of hand, so, but we are watching this carefully.’

Borrowing for the purchase of residential property hit a record $28.8 billion in January 2021, up 34.8% from the decade average.

The regulator is happy with how lending is being carried out, at least for now, as of December 2020. Indeed, with Sydney and Melbourne coming out of lockdowns during the period, it was encouraging to see the rise in home loan activity, they noted in their quarterly report (1).

New mortgages increased their share of the lending to 19.2%, up from 18.5% in the September quarter, which is about the average (18.7%) over the past two years. The highest percentage was 45.5% recorded in June 2015.

Interest-rate only loans are seen as some of the riskiest and have become popular with investors due to tax deductions. However, investors are making up a small proportion of the total loans written, so this was not seen as a concern.

Debt to Income

One way of analysing the risk is to look at total debt divided by the income on which the loan is repaid. The higher this is, the riskier the loan market has become, as people’s ability to repay falls.

APRA caution against this exceeding 6. So, if you wanted to buy a property worth 900K, then you’d need an income of at least $150K a year.

The proportion of loans that have a debt to income of more than 6 is something to watch. In the December quarter 2020, this was 7%, which has risen gradually from below 5% in March 2019.

% of Loans originated with a Loan to Income Ratio >=6x

Loans at more than 6 loan to income
Source: APRA, CoreLogic.

If house prices rise more than wages, then we will see debt to income rise, and the proportion of those above 6 also increase. In Sydney, the number is already around 8.5, and in Melbourne 7.5.

Loan to Value

As the property itself is the underlying collateral of a home loan (and the income of the borrower the means by which to repay it), then loan to value rations (LVRs) are also important.

New home loans in the December quarter (2020) that had LVRs above 80% rose to 42%, up from 39.9% the previous quarter. It was also the highest on record.

For now, APRA has suggested this reflects more owner-occupiers in the market (less investors), mainly first home buyers.

All in all, things are getting a little riskier, but the levels are not at a level to cause concern. Yet. However, if these risk ratios continue to rise, or even accelerate, then there could be cause to cool things down a bit and lower the lending risks accordingly.

~~

(1) Quarterly authorised deposit-taking institution statistics, APRA, March 2021

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