Concerns of a meltdown bubbling in the property market continue to mount as prices push higher and debts rise. Today, ASX 200 bank shares will be in the spotlight after the government gives regulators the thumbs up for clamping down on home loans.
The move comes mere weeks after the governor of the Reserve Bank of Australia, Philip Lowe, reiterated that the central bank will not be raising interest rates in an attempt to regulate the housing market. Instead, Lowe urged regulators to step in and fulfil their responsibility.
Any further regulation could have impacts on the ASX 200’s banks. After all, around 60% of their lending is derived from housing.
What could weigh on ASX 200 bank shares?
Investors in Australian banks are waking up this morning to news of potentially tighter regulations surrounding home lending.
According to The Australian Financial Review, Treasurer Josh Frydenberg has given regulators the go-ahead for a crackdown on the booming market. Specifically, high debt-to-income home loans are in focus as all-time low interest rates spur on large borrowings.
The signal follows reports that more than one in five home buyers are borrowing more than six times their annual incomes.
Clearly, this is a risk in the eyes of regulators such as the Australian Prudential Regulation Authority. While not a concern currently, rising interest rates could exacerbate mortgage distress in the future.
As reported in The AFR, Frydenberg explained the housing dynamic in Australia, stating:
With Australia’s economy well positioned to strongly recover as restrictions ease, it is important to continually assess the appropriateness of our macro-prudential settings.
We must be mindful of the balance between credit and income growth to prevent the build-up of future risks in the financial system. Carefully targeted and timely adjustments are sometimes necessary. There are a range of tools available to APRA to deliver this outcome.
At this stage, no actions have been taken on lending restrictions imposed on ASX 200 banks. However, it is expected regulators will be collecting more lending data in the meantime to make a better-informed decision.
Any actions would likely be focused on the amount of high debt-to-income multiples, as opposed to other facets of lending. Interestingly, the amount of home loans with loan-to-value ratios of more than 90 has been trending downwards since 2008.
Sooner rather than later
The largest ASX 200 bank, Commonwealth Bank of Australia (ASX: CBA), has increased its serviceability criteria for its home loans. Loan applicants are now assessed on an interest rate of 5.25%, up from 5.1% previously. This is an action that CEO Matt Comyn believes other banks should also be adopting.
We think it would be important to take some modest steps sooner rather than later to take some of the heat out of the housing market.
In terms of regulatory options, the International Monetary Fund pointed out a couple in its biannual report. These included increasing interest serviceability buffers and implementing restrictions on debt-to-income and loan-to-value ratios.