Rate hikes taking toll on borrowers, says Standard & Poor’s

The Australian 12:00am June 21, 2017

Michael Roddan

Interest rate increases on borrowers are showing signs of stressing the housing market, with global ­ratings agency Standard & Poor’s blaming the household income squeeze on rising loan arrears.

The warning came as ASIC chairman Greg Medcraft said the corporate watchdog had identified lending standards as a “key risk” in the current environment of surging house prices, escalating household debt and stagnant wage growth.

“For a while now we’ve been concerned about low interest rates and property prices, and about people getting in over their heads,” Mr Medcraft told journalists at a Bloomberg forum in Sydney. “That’s why I’ve said, for some people, you’ve got to really think interest rates won’t stay where they are forever and you’ve got to be realistic about your ­income.”

S&P yesterday blamed out-of-cycle interest rate rises for a spike in home loans in arrears, which jumped five basis points to 1.21 per cent in April. S&P said regional banks were most severely affected by borrowers falling behind in their payments, with arrears rising to 2.27 per cent in April from 2.02 per cent a month earlier.

“Part of the increase reflects a decline in outstanding loan balances; but we believe interest-rate rises announced by different lenders during the past few months affected Australian prime mortgages, given that most of the loans are variable-rate mortgages,” S&P analyst Erin Kitson said.

Shares in Westpac, National Australia Bank and ANZ all fell more than 1 per cent yesterday. Commonwealth Bank stock closed down 0.7 per cent.

The Australian Prudential Regulation Authority’s new restrictions on interest-only lending have sparked a rush of rate rises as banks attempt to douse demand for the loans, which are considered to be riskier than borrowers paying down interest and principal. Rate comparison group Canstar found during the month of May, the average rate on interest-only loans had increased by 29 basis points, while standard variable rates rose 16 basis points.

Westpac, the nation’s largest lender to investors, which also has the largest interest-only portfolio, announced rate rises of 34 basis points for owner-occupiers and investors with interest-only loans. Westpac subsidiary St ­George announced similar rate increases. The changes will force ­borrowers to pay an extra $1200 a year, on ­average.

This week, Reserve Bank governor Philip Lowe again stressed that stagnant wage growth was one of the biggest threats to the economy. Australia has recorded four years of declining wages growth, which is now running at the lowest rate since data had been collected, at 1.9 per cent a year. Dr Lowe has made it clear the RBA is concerned about the combination of sluggish wage rises and high household debt as a threat to the stability of the economy.

Global ratings agencies are also increasingly worried about the state of the housing market. Moody’s on Monday downgraded the credit ratings on a slew of ­Australian banks, following in the footsteps of S&P a month earlier, blaming the rising vulnerability of the banks to a housing market ­correction amid exploding levels of household debt. Average debt has reached 190 per cent of household income.

Commenting on the Moody’s downgrade, Greens senator Peter-Whish Wilson said politicians were wrongly focused on government debt and the risk to the sovereign credit ratings. He said housing debt was “the real debt problem” rarely discussed in Canberra, which has “once again stung us all on the bum”.

“Housing debt is paralysing the Australian economy. Unsustainable and risky housing debt is the clear and present danger to the Australian economy,” Senator Whish-Wilson said.

Mr Medcraft said while APRA was focused on controlling systemic risks in the financial sector, ASIC was making sure it “held everyone to account of responsible lending”. Westpac is defending allegations brought by ASIC that the bank failed to properly assess whether borrowers could repay a loan at the end of the five-year ­interest-only period, when monthly repayments jump by about 40 per cent.

Mr Medcraft, a former banker with Societe Generale in New York, said ahead of the global ­financial crisis lenders loosened standards in a bid to chase volume growth as the market cooled.

“Wages growth has been very muted. Property prices in Sydney are 12 times income. People really need to think about that,” he said.

“This is why the interest-only (lending) is relevant. If you can basically never afford to pay off your principal, then maybe you should rent.”

Mr Medcraft said part of the government’s extra funding for ASIC was devoted to hiring more staff to focus on responsible lending, with a broadening of the watchdog’s focus onto the non-bank sector. The non-bank sector will soon also be brought under the regulatory scope of APRA.