Property Market – Page 189 – Digital Finance Analytics (DFA) Blog

A $90 Billion Debt Wave Shows Cracks in U.S. Property Boom

A $90 billion wave of maturing commercial mortgages, leftover debt from the 2007 lending boom, is laying bare the weak links in the U.S. real estate market.

It’s getting harder for landlords who rely on borrowed cash to find new loans to pay off the old ones, leading to forecasts for higher delinquencies. Lenders have gotten choosier about which buildings they’ll fund, concerned about overheated prices for properties from hotels to shopping malls, and record values for office buildings in cities such as New York. Rising interest rates and regulatory constraints for banks also are increasing the odds that borrowers will come up short when it’s time to refinance.

“There are a lot more problem loans out there than people think,” said Ray Potter, founder of R3 Funding, a New York-based firm that arranges financing for landlords and investors. “We’re not going to see a huge crash, but there will be more losses than people are expecting.”

The winners and losers of a lopsided real estate recovery will be cemented as the last vestiges of pre-crisis debt clear the system. While Manhattan skyscraper values have surged 50 percent above the 2008 peak, prices for suburban office buildings still languish 4.8 percent below, according to an index from Moody’s Investors Service and Real Capital Analytics Inc. Borrowers holding commercial real estate outside of major metropolitan areas are now feeling the pinch as they attempt to secure fresh financing, Potter said.

The delinquency rate for commercial mortgages that have been packaged into bonds is forecast to climb by as much as 2.4 percentage points to 5.75 percent in 2017, reversing several years of declines, as property owners struggle with maturing loans, according to Fitch Ratings. That sets the stage for bondholder losses.

CMBS Record

Banks sold a record $250 billion of commercial mortgage-backed securities to institutional investors in 2007, and lax lending standards enabled landlords across the U.S. to saddle buildings with large piles of debt. When credit markets froze the following year, Wall Street analysts warned of a cataclysm, with $700 billion of commercial mortgages set to mature over the next decade.

“At the depths of the panic, it was just that: panic,” said Manus Clancy, a managing director at Trepp LLC, a firm that tracks commercial-mortgage debt. “That made people’s future expectations extremely bearish. Extremely low interest rates over the last four or five years have forgiven a lot of sins.”

The CMBS market roared back after an 16-month shutdown, and lenders plowed into real estate as an antidote to skimpy returns for other investments. The cheap loans helped propel property values to record highs in big cities such as New York and San Francisco, alleviating concerns about the mountain of debt coming due.

Credit for property owners has once again become scarce in some pockets. Borrowing costs jumped following the surprise election of President Donald Trump, and Wall Street firms are being more cautious as new regulations kick in requiring them to hold a stake in the mortgages they sell off. Other lenders are scaling back on commitments to property types and locations where problems have gotten harder to ignore.

Struggling Malls

Lenders are taking an increasingly dim view of retail properties — especially malls — as the growth of e-commerce eats into sales at brick-and-mortar stores. Malls tend to have higher loss rates than other property types after a default, increasing the stigma for lenders, according to Lea Overby, an analyst at Morningstar Credit Ratings LLC.

When malls “start to go downhill, if nothing is done to turn the ship around, they plummet,” Overby said. “The fate of some of these malls is very, very uncertain.”

The Sunset Mall in San Angelo, Texas, added a glow-in-the-dark mini golf course in June, part of a nationwide trend of retailers trying to lure customers with experiences they can’t find online. Yet when a $28 million mortgage came due in December, the borrower couldn’t refinance it, according to data compiled by Bloomberg. The debt, part of a bond deal sold by Citigroup Inc. and Deutsche Bank AG in March 2007, was handed off to a firm specializing in troubled loans.

A similar storyline is playing out at a 82,000-square-foot (7,600-square-meter) suburban office complex in Norfolk, Virginia, whose tenants include health-care services firms. The borrower stopped making payments on a $20 million loan that comes due next month and can’t refinance the debt, Bloomberg data show.

Representatives for the owners of the properties didn’t respond to phone calls seeking comment on the loans.

Manhattan Tower

Landlords that own high-profile buildings in big cities are faring better. At 5 Times Square, the Manhattan headquarters for Ernst & Young LLP, the owners are close to securing a five-year loan to pay off $1 billion in debt that comes due in March, according to Scott Rechler, chief executive officer of RXR Realty, which owns 49 percent of the building. RXR acquired its stake in the 39-story tower shortly after the building was sold to real estate investor David Werner for $1.5 billion in 2014.

“We are currently reviewing term sheets from a number of institutions and expect to settle on a lender within a week or so,” Rechler said.

Some borrowers chipped away at the maturity wall by retiring their mortgages early in order to take advantage of ultra-low interest rates. At the same time, landlords with the weakest properties have already defaulted, further reducing the pool of loans that need to be refinanced. The maturity wall has been whittled down to about $90 billion from $250 billion in 2008, according to data from Morningstar. The firm estimates that roughly half of the remaining loans will have difficulty refinancing.

S&P analysts are predicting that about 13 percent of real estate loans coming due will ultimately default, up from 8 percent over the past two years, according to Dennis Sim, a researcher at the firm. That’s their base case, but the default rate could be higher, he said.

“There are a lot of headwinds currently — with the interest-rate increase, with the new administration coming in, and also risk retention,” Sim said. “Those three wild-card factors could also play a role in how some of the better-performing loans are able to refinance or not.”

Rental Stress Now Hits 42.5% of Low Income Households

The latest report from the Productivity Commission “Report on Government Services 2017, Volume G: Housing and homelessness” shows rental stress is on the rise. Nationally, the proportion of low income renter households in rental stress increased from 35.4 per cent in 2007-08 to 42.5 per cent in 2013-14.

This is an indirect, but significant impact of the ever rising un-affordable housing burden.

In addition, the report included data on Commonwealth Rent Assistance (CRA) showing a rise in payment to reduce rental stress, of $4.4 billion in 2015-16. A further hidden impact of high housing costs.

CRA helps eligible people meet the cost of rental housing in the private market, aiming to reduce the incidence of rental stress. It is an Australian Government non-taxable income supplement, paid to recipients of income support payment, ABSTUDY, Family Tax Benefit Part A, or a Veteran’s service pension or income support supplement.

Australian Government expenditure on CRA was $4.4 billion in 2015-16, increasing in real terms from $3.6 billion in 2011-12. The average government CRA expenditure per eligible income unit was $3251 in 2015-16.

Nationally in June 2016, there were 1 345 983 income units receiving CRA . Of these, 79.4 per cent paid enough rent to be eligible to receive the maximum rate of CRA (an increase from 75.0 per cent in 2012).

The median CRA payment at June 2016 was $130 per fortnight, with median rent being $437 per fortnight.

CRA and rental stress

Rental stress is defined as more than 30 per cent of household income being spent on rent, and is a separate sector-wide indicator. CRA is indexed to the Consumer Price Index (CPI) but rental costs have increased at a faster rate than the CPI since 2008 (ABS 2016), so the real value of CRA payments has decreased for individuals in that time.

Nationally in June 2016, 68.2 per cent of CRA income units would have paid more than 30 per cent of their gross income on rent if CRA were not provided — with CRA this proportion was 41.2 per cent.

The table below presents a range of CRA data, including Australian Government expenditure and information on CRA income units — including Aboriginal and Torres Strait Islander recipients, those with special needs — and those in rural and remote areas.

Housing affordability and the changing debt burden

Excellent opinion piece (and charts) in the Guardian by Philip Soos, which nicely underscores the debt burden issue we have been highlighting.

Australia’s historically high and rising housing prices are widely debated and have prompted a number of government inquiries into housing affordability.

The question stands open: is housing affordable in Australia?

Affordability is often confused with related concepts such as ease of entry, serviceability and valuation. Ease of entry refers to the difficulty of purchase, whereas serviceability measures the burden of mortgage repayments relative to household income.

Valuation considers whether prices are efficient relative to economic fundamentals. Opinions are divided on this: housing prices could be 30% undervalued, a bubble which is 40% overvalued, or somewhere in between.

It is often claimed housing is affordable because nominal mortgage interest rates are low, having significantly declined since the peak of 17% in 1990. The standard mortgage payment formula shows nationwide debt repayments relative to household incomes are lower today than in 1990 and the smaller peak in 2008.

This metric is problematic because it is static, capturing the payments-to-income ratio at each particular point in time. The ratio at the peak in 1990, for instance, is very high if, and only if, prices, interest rates and incomes are constant over the life of the mortgage. This doesn’t reflect reality and a more dynamic approach is required.

First, the deposit-to-income ratio is the highest on record. Lenders may accept smaller deposits today but this is not a genuine choice for first home buyers. Starting out with larger loan repayments and lower equity is unlikely to be compensated for in a low interest rate and anaemic wage growth environment, especially with the added cost of lenders mortgage insurance.

Second, due to larger mortgages, repayments are higher than suggested by interest rates alone. Unfortunately, principal repayments are not officially recorded in our national accounts. The Bank of International Settlements has developed internationally standardised debt service ratios (DSR) to derive estimates of aggregate principal and interest repayments to income.

Household debt and prices escalated, interest rates declined and principal payments rose over the years. The gap has widened between interest payments to income and the DSR from around 1% between the late 1970s and early 1990s to a record 6% today.

By disregarding rising principal payments, vested interests downplay the immense debt burden assumed with a typical mortgage.

Worryingly, the bank states, “the DSR is a reliable early warning indicator for systemic banking crises. Furthermore, a high DSR has a strong negative impact on consumption and investment.” The DSR is currently 15% nationwide, far higher than the US, UK and Spain at the peaks of their housing bubbles. Estimates of the DSR for New South Wales and Victoria are 18%, which demonstrates extreme indebtedness.

Third, past research from the RBA recently surfaced in the media, examining the effects of wage inflation on mortgage payments. While high interest rates result in onerous payments relative to income, this only occurs in the early phase as high wage growth inflates away the burden. In contrast, borrowers facing high housing prices with low interest rates and poor wage growth face a greater burden across the life of the mortgage due to greater payments-to-income.

Everyone apart from the very wealthy has to purchase with a mortgage. Therefore, only by anchoring serviceability of payments-to-income can a genuine estimate of affordability be made. Generally, 30% of income is the accepted maximum.

High wage growth relative to interest rates and prices during the 1960s and 1970s made housing quite affordable. Higher prices and interest rates in the 1980s increased the burden. When interest rates peaked in 1990, payments were arduous but quickly declined.

While interest rates and wage growth for the next 25 years cannot be known, they are assumed to hold still at the present rates: 5.7% for the average imputed mortgage interest rate and 1.4% for wages. While the present interest rate may seem high, lower rates will inevitably prompt further housing price growth.

Buyers from, say, 2010 face onerous payments over the life of their mortgage compared to those who purchased in 1980 and 1990 when interest rates were much higher. The average ratio across the lifetime of the mortgage for all purchases dates are 1960 (10%), 1970 (10%), 1980 (18%), 1990 (27%), 2000 (23%) and 2010 (37%).

Although not shown, affordability is even worse in 2016 due to rising prices, with an estimated average payment ratio of 42%. The payment burden for 2010 and 2016 is still extreme and higher than 1990, even when factoring in lower estimated interest rates (4%) and higher wage growth (2%).

The measures presented above are absent from mainstream analysis today precisely because they demonstrate severe unaffordability, confirmed by the highest deposit-to-income ratios, the highest debt repayments relative to income over the lifetime of the mortgage and very high DSRs. Over 50% of first home buyers today are reliant on parental assistance.

There are three ways to assist affordability: declining interest rates, rising wage growth and falling housing prices. Aspiring first home buyers are severely disadvantaged; nominal wage growth is currently at the lowest level since the second world war and there is little room for interest rates to go lower. The only path to improved affordability is by reducing housing prices.

This is obviously opposed by political parties, the finance, insurance and real estate sector and economists employed by vested interests. Instead, we are bombarded with a disgraceful litany of pronouncements, fabricated to defend record high housing prices and unaffordability.

Young adults are condemned as lazy and inept, allegedly misspending their income on alcohol or stuffing themselves with smashed avocado toast in hipster cafes. To protect unjustified privilege – unearned rises in housing prices – vested interests have twisted a very real affordability crisis into moral failing by the young. They are told to get onto the housing ladder by purchasing an investment property or to “get a good job”.

The appalling government report recently published on home ownership (at which I testified) was a miserable 45 pages short and made no recommendations. The government made no pretense of objectivity; dissenting reports by the ALP and Greens were more informative.

The evidence shows housing prices and unaffordability are at record highs. This appalling state of affairs is maintained by an undemocratic politburo of vested interests accustomed to extracting a staggering proportion of unearned income and wealth. Manufacturing claims of youthful indolence is merely another day at the office.

Will anything be done to lower housing prices? On the contrary, the politburo endlessly champions higher prices by seeking further interest rate cuts, increasing our already third-world rates of population growth via immigration and could implement another inflationary first home owners boost on the pretext of assisting first home buyers – which enriches existing landholders and bankers.

The state of policymaking and economic management in Australia is extremely poor and entirely intentional. If the young are to learn an important lesson, it is this: no matter how hard things are, vested interests are committed to making their lives ever more difficult.

ABC News 24 Does Household Mortgage Rate Sensitivity

We discussed the mortgage rate sensitivity analysis we recently completed on News 24 tonight.

One in five homeowners will struggle with rate rise of less than 0.5%

From News.com.au

ONE in five Australians are walking such a fine mortgage tightrope that they could lose their homes if interest rates rise by even 0.5 per cent.

Our love affair with property has pushed Australia’s residential housing market to an eye-watering value of $6.2 trillion.

But as we scramble over each other to snap up property while interest rates are at historic lows, we have gotten ourselves into a bit of a pickle. We might not actually be able to afford funding our affair.

An analysis, based on extensive surveys of 26,000 Australian households, compiled by Digital Finance Analytics, examined how much headroom households have to rising rates, taking account of their income, size of mortgage, whether they have paid ahead, and other financial commitments. And the results are distressing.

It showed that around 20 per cent — that’s one in five homeowners — would find themselves in mortgage difficulty if interest rates rose by 0.5 per cent or less. An additional 4 per cent would be troubled by a rise between 0.5 per cent and one per cent.

Almost half of homeowners (42 per cent) would find themselves under financial pressure if home loan interest rates were to increase from their average of 4.5 per cent today to the long term average of 7 per cent.

“This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards,” Digital Finance Analytics wrote.

The major banks have already started increasing their home loan rates this year, despite the market broadly expecting the Reserve Bank to keep the cash rate steady at 1.5 per cent this year.

Just this week NAB upped a number of its owner-occupied and investment fixed rate loans.

“There are a range of factors that influence the funding that NAB — and all Australian banks — source, so we can provide home loans to our customers,” NAB Chief Operating Officer, Antony Cahill, said of the announcement.

“The cost of providing our fixed rate home loans has increased over recent months.”

So as interest rates rise and leave mortgage holders in its dust, it leaves a huge section of society, and our economy, exposed and at risk.

NOT TERRIBLY SURPRISING

Martin North, Principal of Digital Finance Analytics, said the results are concerning, albeit not surprising.

“If you look at what people have been doing, people have been buying into property because they really believe that it is the best investment. Property prices are rising and interest rates are very low, which means they are prepared to stretch as far as they can to get into the market,” Mr North told news.com.au.

But the widespread assumption that interest rates will remain at historic lows is a disaster waiting to happen, especially in an environment where wage growth is stagnant.

“If you go back to 2005, before the GFC, people got out of jail because their incomes grew a lot faster than house prices, and therefore mortgage costs. But the trouble is that this time around we are not seeing any evidence of real momentum in income growth,” Mr North said.

“My concern is a lot of households are quite close to the edge now — they are not going to get out of jail because their incomes are going to rise. We are in a situation where interest rates are likely to rise irrespective of what the RBA does … There has already been movement up.”

Australia’s wages grew at the slowest pace on record in the three months to September 2016, according to the latest Wage Price Index released by the Australian Bureau of Statistics (ABS).

And as a result Australia’s debt-to-income ratio is astronomical. The ratio of household debt to disposable income has almost tripled since 1988, from 64 per cent to 185 per cent, according to the latest AMP. NATSEM Income and Wealth report.

What this means is that many Australian households are highly indebted, thanks in large part to the property market, without the income growth to pay it down.

“The ratio of debt to income is as high as it’s ever been in Australia and there are some households that are very, very exposed,” Mr North said.

THE YOUNG AND RICH MOST AT RISK

This finding will come as a surprise: young affluent homeowners are the most at risk — it is not just a problem with struggling families on the urban fringe. When it comes to this segment of the market, around 70 per cent would be in difficulty with a 0.5 per cent or less rise. If rates were to hike 3 per cent, bringing them to around the long term average of 7 per cent, nine in ten young affluent homeowners would feel the pressure.

“It is not necessarily the ones you think would be caught. And that’s because they are actually more able to get the bigger mortgage because they’ve got the bigger income to support it.

“They have actually extended themselves very significantly to get that mortgage — they have bought in an area where the property prices are high, they have got a bigger mortgage, they have got a higher LVR [loan-to-valuation ratio] mortgage and they have also got lot of other commitments. They are usually the ones with high credit card debts and a lifestyle that is relatively affluent. They are not used to handling tight budgets and watching every dollar.”

And while the younger wealthy segment of the market being most at risk might not be of that much importance compared to other segments, Mr North said what is concerning is the intense focus on this market.

“Any household group that is under pressure is a problem for the broader economy because if these people are under pressure they are not going to be spending money on retail and the broader economy,” Mr North told news.com.au.

“The banks tend to focus in on what they feel are the lower risk segments and the young affluent sector has actually been quite a target for the lending community in the last 18 months. Be that investment properties or first time owner-occupied properties, my point is there is more risk in that particular sector than perhaps the industry recognises.”

TOUGHER HOME LOAN RESTRICTIONS NEEDED

Now an argument is mounting that Australian banks need to toughen up their approach to home lending.

“I think we have got a situation where the information that is being captured by the lenders is still not robust enough. I am seeing quite often lenders willing to lend what I would regard as relatively sporty bets … I’m questioning whether the underwriting standards are tight enough,” Mr North said.

This includes accepting financial help from relatives for a deposit, a growing trend among first home buyers.

“The other thing that I have discovered in my default analysis is that those who have got help from the ‘Bank of Mum and Dad’ to buy their first property are nearly twice as likely to end up in difficulty … It potentially opens them to more risk later because they haven’t had the discipline of saving.”

News.com.au contacted several banks for comment on whether they think a rethink of their underwriting standards is needed. Only one lender, Commonwealth Bank, agreed to comment, but remained vague on the topic.

“In line with our responsible lending commitments, we constantly review and monitor our loan portfolio to ensure we are maintaining our prudent lending standards and meeting our customers’ financial needs. Buffers and minimum floor rates are used when assessing loan serviceability so it is affordable for customers,” a CBA spokesman said in an emailed statement.

But Mr North said something needs to be done before we find ourselves in a property and economic downturn.

“I’m assuming that with the capital growth we have seen in the property market, it will allow people who get into significant difficulty to be able to get out, however, it’s the feedback concern that I’ve got.

“If you have got a lot of people in the one area struggling with the same situation, you might see property prices begin to slip. If we get the property price slip, and we get unemployment rising and interest rates rising at the same time, we have that perfect storm which would create quite a significant wave of difficulty.

“We need to be thinking now about how to deal with higher interest rates down the track. We can’t just say it will be fine because it won’t be,” he told news.com.au.

Home Lending On The Rise

The latest housing finance data from the ABS underscores the renewed momentum in home mortgage lending, especially in the investment sector, and there was also a rise in first time buyers accessing the market.

The trend estimate for the total value of dwelling finance commitments excluding alterations and additions rose 0.6%. Investment housing commitments rose 1.7%, while owner occupied housing commitments was flat. In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions rose 2.2%.

In trend terms, the number of commitments for owner occupied housing finance fell 0.1% in November 2016 whilst the number of commitments for the purchase of new dwellings rose 0.7%, the number of commitments for the construction of dwellings rose 0.2%, and the number of commitments for the purchase of established dwellings fell 0.2%.

In original terms, the number of first home buyer commitments rose by 13.4% to 8,281 in November from 7,302 in October; the number of non-first home buyer commitments also rose. The number of first home buyers as a percentage of total owner occupier commitments rose from 13.7% to 13.8%.

Total commitments in trend terms was $32.7 billion, of which $19.8 billion was owner occupied loans, and $12.9 billion for investment purposes. 39.5% of new lending was for investment purposes, and we see the proportion of investment loans continuing to rise, it is already too high.

Looking at the month on month movements, the seasonally adjusted changes highlight the rise in the investment funding for new construction, with a 40% rise on last month. Owner occupied refinancing fell.

The more reliable trend analysis shows the monthly movements, with a strong surge in investment loans by individuals, and a stronger fall in owner occupied refinancing.

Looking at total loan stock (in original terms) around 35% of all loans outstanding are for investment purposes, and the slide we saw late 2015 appears to be easing.

Turning to the first time buyer, original data, the number of first time owner occupied buyers rose compared with last month, and the overall mix also increased.

Combining the first time buyer property investor data from our surveys, we see a spike in overall first time buyer activity.

Last month, around 1,100 more first time buyers entered the owner occupied market than the prior month (12%), and around 150 more in the investment sector. We also saw a rise in the fixed rate loans, as borrowers try to lock in lower rates ahead of expected rises.

So overall, still strong momentum in the housing sector, and powered largely by an overheated investment sector.

APRA On The Countercyclical Capital Buffer

APRA released a brief update to support their zero Countercylical Capital Buffer setting. As they say “the countercyclical capital buffer is designed to be used to raise banking sector capital requirements in periods where excess credit growth is judged to be associated with the build-up of systemic risk. This additional buffer can then be reduced or removed during subsequent periods of stress, to reduce the risk of the supply of credit being impacted by regulatory capital requirements”.

APRA may set a countercyclical capital buffer within a range of 0 to 2.5 per cent of risk weighted assets. On 17 December 2015, APRA announced that the countercyclical capital buffer applying to the Australian exposures of authorised deposit-taking institutions (ADIs) from 1 January 2016 would be set at zero per cent. An announcement to increase the buffer may have up to 12 months’ notice before the new buffer comes into effect; a decision to reduce the buffer will generally be effective immediately.

APRA reviews the level of the countercyclical capital buffer on a quarterly basis, based on forward looking judgements around credit growth, asset price growth, and lending conditions, as well as evidence of financial stress. APRA takes into consideration the levels of a set of core financial indicators, prudential measures in place, and a range of other supplementary metrics and information, including findings from its supervisory activities. APRA also seeks input on the level of the buffer from other agencies on the Council of Financial Regulators.

A range of core indicators are used to justify their position. Here are their main data-points.

Credit growth

Credit-to-GDP ratio (level, trend and gap)

The credit-to-GDP gap is defined as the difference between the credit-to-GDP ratio and its long-run trend. The long-run trend is calculated using a one sided Hodrick-Prescott filter, a tool used in macroeconomics to establish the trend of a variable over time. The credit-to-GDP gap for Australia is currently negative at -3.9. The Basel Committee suggests that a gap level between 2 and 10 percentage points could equate to a countercyclical capital buffer of between 0 and 2.5 percent of risk-weighted assets.

Housing credit growth

The pace of housing credit growth has slowed this year, growing at 6.4 per cent year on year as at September 2016, down from 7.5 per cent at the time the buffer was initially set. Investor housing credit growth fell from 10 per cent to 4.9 per cent over the same period, however the pace of growth has been increasing again more recently. APRA has identified strong growth in lending to property investors (portfolio growth above a threshold of 10 per cent) as an important risk indicator for APRA supervisors.

Business credit growth

Business credit growth increased marginally in the first half of 2016. However, business credit growth has fallen over recent quarters; annual growth in business credit was 4.8 per cent over the year to end September 2016, down from 6.3 per cent as at September 2015. Notwithstanding the lower overall rate of growth, commercial property lending growth (not shown) has remained strong, growing 10.5 per cent year on year as at September 2016.

Asset Prices

National housing price growth remains strong, but has slowed relative to 2015 peaks, growing nationally at around 3.5 per cent over the 12 months to September 2016. However, over a shorter horizon, prices have been reaccelerating recently with six month-ended annualised price growth of 7.2 per cent nationally as at September 2016 (albeit still a slower pace than 2015 peaks). Conversely, rental growth and household income growth have been relatively weak. Looking beyond the national averages, conditions vary significantly across individual cities and regions. In particular, housing price growth has strengthened in Sydney and Melbourne over recent months with six month-ended annualised growth rates of 11.4 per cent and 9.0 per cent respectively.

Non-residential commercial property has also been exhibiting strong price growth, though this has moderated somewhat in recent months (not shown).

Lending indicators

APRA monitors a range of data and qualitative information on lending standards. For residential mortgages, the proportion of higher-risk lending is a key metric. Over the past few years, APRA has heightened its regulatory focus on the mortgage lending practices of ADIs in order to reinforce sound lending practices. This has included, but not been limited to, the introduction of benchmarks on loan serviceability and investor lending growth, and the issuance of a prudential practice guide on sound risk management practices for residential mortgage lending.

In general, higher-risk mortgage lending has been falling recently with the share of new lending at loan-to-valuation ratios greater than 90 per cent falling from 9.5 per cent to 8.1 per cent over the year to September 2016. Other forms of higher-risk mortgage lending including high loan-to-income and interest-only lending (not shown) have also moderated from 2015 peaks, although there has been some pick-up in the share of interest-only lending recently.

In business lending, banks have showed some evidence of tightening lending standards more recently, in particular for commercial property lending, with the lowering of loan-to-valuation and loan-to-cost ratios on certain development transactions (not shown).

Lending rates had been steadily falling for both housing and business lending to historical lows. More recently however, lending rates have fallen by less than the cash rate, with banks passing on around half of the August cash rate reduction. Lending rates have also risen in recent weeks in response to higher costs in wholesale funding markets. In particular, a number of ADIs have recently announced increases to their mortgage lending rates with some ADIs specifically targeting investor and interest-only loans.

APRA’s confidential quarterly survey of credit conditions and lending standards provides qualitative information on whether conditions are tightening or loosening in the industry.

Financial Stress

Indicators of financial stress are used in informing decisions to release any countercyclical capital buffer. While a wide range of indicators could signify a deterioration in conditions, APRA has identified non-performing loans as its core indicator of financial stress.

The share of non-performing loans remains low, though it has increased moderately over 2016, to 0.93 per cent as at September 2016, largely driven by increases in regions and sectors with exposures to mining.

So, everything is looking rosy, in their view. However, the high household debt to income ratio and the fact that debt servicing is supported by ultra low interest rates is not included adequately in their assessment – seems myopic in my view, but then this continues the regulatory group-think. In addition the use of “confidential quarterly survey data” highlights the lack of industry disclosure.

The Definitive Guide To Our Latest Mortgage Stress Research

We have had an avalanche of requests for further information about our monthly mortgage stress research which is published as a series of blog posts plus coverage in the media, including Four Corners. Here is the timeline of recent posts, which together provides a comprehensive view of the work.

Mortgage Stress Eases A Little In May

Mortgage Stress Pushes Higher In January 2020

Mortgage Stress Steady In August 2019

July 2019 Mortgage Stress Still Up, Despite Rate Cuts

Mortgage Stress Higher Post the Election

Mortgage Stress Builds Again as Debt Grows

Mortgage Stress Accelerates Again as Debt Grows

Mortgage Stress At Record High (Again)

Mortgage Stress Is Breaking More Households

Mortgage Stress Gets More Extreme In November 2018

Mortgage Stress Climbs Again in October

Mortgage Stress Busts The 1 Million Households

Mortgage Stress Continues To Build In August 2018

Household Financial Pressure Tightens Some More

Mortgage Stress Continues To Claw Higher

April Mortgage Stress Trends Higher … Again…

Mortgage Stress Feb 2018, Refinancing Helps, But Still Higher

Mortgage Stress Still With Us In 2018

Top 10 Mortgage Stress Countdown At December 2017

Households Under The Mortgage Stress Gun In December

Mortgage Stress Continues On a High Plateau In November

October Mortgage Stress Higher Again – See The Top 10 Post Codes

Top 10 Mortgage Stress Count Down – September 2017

More than 30,000 of the nation’s ‘richest’ households in financial distress

Mortgage Stress Still On The Up

ABC Four Corners Does Mortgage Stress

Mortgage Stress Gets Worse in July

Mortgage Stress Grinds Higher In June

Australians Curb Spending as Household Debt Balloons

Mortgage Stress Accelerates Further In May

What The Mortgage Stress Data Tells Us

Mortgage Stress And Default Probability Rise Again In April

Record numbers under mortgage stress

Mortgage Stress Analysis Using the DFA Market Model

Seven News Melbourne Does Mortgage Stress

Nine News Does Mortgage Stress

So Where Will The Property Market Go In 2017?

Mortgage Stress And Probability Of Default Is Rising

Mortgage Stress Covers 18.5% Of Book Value

A Segmented View Of Mortgage Stress and Default

Top 20 Postcodes For Mortgage Stress Across Australia

New DFA Video Blog – Household Mortgage Stress and Defaults

The Full 100 Mortgage Stress Listing

Check out our media coverage.