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Australian banks shrug off warnings to rein in investor property loans
[SYDNEY] Frothiness in Australia's property market has triggered central bank warnings of regulatory steps to rein in loans to investors, but the nation's banks are turning a deaf ear, sceptical that any such action is needed or imminent.
Lending to investors has jumped this year to its highest since comparable records started in 1991, accounting for about half of Australia's residential loans in value terms. Investor interest has also helped pushed housing prices in Sydney and Melbourne to the point where most first-time home buyers are widely seen as priced out of the market.
For the Reserve Bank of Australia, the fear is that too much speculation will increase the risk of a sharp correction in housing prices which in turn would hit consumer confidence. It is working with other regulators and says a preliminary announcement on steps to reinforce sound lending practices could come by the end of the year.
If it succeeds in quickly bringing forth regulation with bite, the nation's big four banks - Commonwealth Bank of Australia, Westpac Banking Corp, Australia and New Zealand Banking Group and National Australia Bank - could see a sharp slowdown in one of their biggest sources of revenue growth.
But banking executives say they are not worried and expect the central bank's jawboning will remain just that for some time.
"There's definitely been a firming up of the regulator's language but we still think they're at a stage where they're just putting out warning messages rather than likely to intervene anytime soon," said Steven Munchenberg, CEO of Australian Bankers' Association Inc.
Mortgage lending has been a staple and powerful diet for Australia's major banks, accounting for 40-60 percent of their loans and helping them notch up five straight years of record profits. Without regulation, they are unlikely to voluntarily cut back on any part of that, let alone the juiciest portion.
"The investor market is pretty attractive," said Tony Bice, managing director at Mortgage Choice which writes about US$500 million of home loans each month.
"There is very low activity from first home buyers. Banks are tumbling on top of each other to attract new clients, they are not getting the volumes they want so it would be suicidal to pull back or raise home loan rates now," he added.
For their part, banking executives say they simply don't see the need for any pullback, arguing the RBA is wrong in its assessments of macro-economic risks and stressing that their lending practices are conservative by international standards.
Much of the market's problems are caused by lack of supply, they say. And while the average Sydney home price has jumped 14 per cent in the last 12 months, they counter that this is a response to years of weakness in the market largely caused by the global financial crisis.
Average growth for the past five years is a reasonable 3.3 per cent while over the past 10 years, it is just 0.5 per cent.
Also proud of prudent lending practices that helped them come through the global financial crisis relatively unscathed, the banks note that loan-to-value ratios for mortgages in Australia are around 60 per cent - versus about 80 per cent for comparable mortgages in the United States and more than 90 per cent in the United Kingdom.
Property investors also tend to be middle-aged workers with average annual income of A$80,000 and often with access to other sources of income, economists say.
"At the moment, things look pretty manageable. History tends to show investors as borrowers are better quality than owner-occupier homes. So, we don't have much concerns," said a senior executive at one of the major banks, declining to be identified as he was not authorised to talk to the media.
Even if regulation does come to pass, it is unlikely to be particularly burdensome, they add, noting that banks have completed their own 'what if' analyses to gauge the likely costs and impact on returns of any regulatory changes.
Steps that could occur include forcing banks to set aside more capital to cover certain types of lending, or putting caps in loan-to-valuation and debt-to-income ratios, analysts have said.
But the RBA is expected to tread softly as strong measures would risk knocking too much wind out of the property market - one of the few growth areas for the economy as the mining sector peaks out.
The most likely steps are ones that would involve requiring banks to stress-test each loan more thoroughly - which would at the end of the day still leave the discretion to extend loans with the banks, notes a second bank executive.
The RBA's warnings also come amid a government-backed inquiry tasked with setting out a blueprint for the financial system for the next decade. It's looking at a wide range of issues - including reforms for the superannuation industry and steps to help smaller lenders, with a final report due in November.
The potential for bank earnings to be hit by new regulation has, together with a sharply weaker Australian dollar, helped bank stocks lose around 12 per cent from their 2014 peaks.
A possible full plate for regulators could also push back any moves to rein in loans for property investors.
"I don't think this is on the top four list of things that regulators need to do," said the first banking executive. - Reuters