Banks face grilling over surge in lending to property investors
The Australian 12:00am February 2, 2017
Michael Roddan
Two cuts to the official interest rate last year from the Reserve Bank have reignited rampant lending to property investors.
Analysts say it is a “concerning development” given the prudential regulator’s attempts to dampen runaway house price growth and exploding household leverage.
With banks doling out loans to property investors with renewed enthusiasm, data released yesterday showed continued growth in house prices in the capital cities.
Investor lending is expected to come under focus when the big four bank bosses face parliamentary grilling next month.
National Australia Bank chief Andrew Thorburn will be the first to face the semi-annual House of Representatives Committee on Economics hearing on March 3.
UBS banking analysts led by Jonathan Mott said Commonwealth Bank “appears to be driving” the renewed investment lending boom, with its investment lending portfolio currently growing 35 per cent faster than the entire banking market. CBA, the nation’s biggest lender, is scheduled to hand down its first-half results this month.
Meanwhile, NSW Treasury Corporation chief economist Brian Redican said he anticipated an 18 per cent fall in residential building approvals nationally to 190,000 this year, from an estimated 232,000 last year.
“We do expect a slowdown in the NSW property market. We’ve had this incredible run and we are certainly due to plateau,” Mr Redican told The Australian.
During December, lending to property investors grew at a 10.1 per cent annualised rate — which would put it above APRA’s 10 per cent speed limit if the trend continues for the year.
The 10 per cent speed limit was introduced in late 2014 in a bid by the Australian Prudential Regulation Authority to rein in frothy house prices in the capital cities, but new figures from CoreLogic reveal the housing market is still running hot.
Sydney house prices have increased more than 70 per cent since June 2012, the research showed. Over the year to January, house prices across the capital cities are up 10.7 per cent, with Sydney leading with a 16 per cent price increase. This week’s lending figures from APRA showed property investor loans increased 0.8 per cent in the month of December, or an annualised rate of 10.1 per cent.
“While this is healthy for the banks’ bottom lines, we see this as a concerning development given elevated house prices and household leverage,” UBS’s Mr Mott said.
Australian household gearing, or the level of debt compared to disposable income, has risen to 187 per cent — one of the highest rates in the world.
The resurgence in investment lending over recent months has coincided with a sharp decline in owner-occupier loans. Growth in owner-occupied housing credit slowed in December to 0.42 per cent. The slowdown was also evident in CBA’s portfolio, with its owner-occupied lending growing at two-thirds the pace of the overall banking system.
Of the major banks, CBA’s investor lending portfolio increased 7.2 per cent over the year to December, well above National Australia Bank’s increase of 4.3 per cent and Westpac’s 5.1 per cent. ANZ’s investor loan book shrank 1.7 per cent over the last calendar year.
“If investment property lending continues to accelerate it will inevitably lead to calls for further macroprudential regulation … as well as ongoing calls for tax reform to stem speculative investment property activity and rampant house price inflation,” Mr Mott said.
Investor lending growth, which was continually rising at an annual rate of more than 10 per cent until September 2015, recently slowed to as low as 4.5 per cent in August last year, following APRA’s crackdown.
However, following a series of RBA rate cuts, investor lending has steadily increased and reached 6.2 per cent, year-on-year, in December. The RBA cut the official cash rate in May and August last year, leaving it at a record low 1.5 per cent.
Macquarie analyst Victor German said the banks were now “retesting the limits” on investor lending, adding: “This will undoubtedly attract scrutiny from the regulator, particularly given sustained property price appreciation on the eastern seaboard.”
But he said property prices may be contained by the reduced ability of locals to borrow because they were overleveraged.
Adding to the headache for the prudential regulator, banks are continuing to reclassify their lending book, a move that has made their exposure to the heated investor property market appear smaller than previously thought.
The latest monthly figures from APRA included a $3 billion revision to ING Bank’s investor and owner-occupied loans, which meant the figures distorted the overall picture of the lending market and its own compliance with the 10 per cent growth limit.
AMP briefly stopped lending to investors in 2015 in a bid to comply with the APRA limit, as did Teachers Mutual and UniBank. The lenders still above or close to the 10 per cent limit include Defence Bank, Arab Bank Australia and Police Financial Services.