Lenders Continue to Reduce the Risks in Their Mortgage Books
The most recent information from the Australian Prudential Regulation Authority (APRA) on property exposures information from approved store taking foundations (ADIs) demonstrates that the harder loaning arrangements of late years keep on lessening home loan dangers.
Throughout the March 2019 quarter, its APRA report was $72.395 billion in their residential mortgages to households, which was then -17.9% lower than its previous quarter and down -16.5% on March quarter in 2018. As these charts show that the value of lending to investors and owner-occupiers is falling. Over the quarter the values of lending to owner-occupiers was roughly -17.6% lower and it was down -15.2% year-on-year. But lending to investors was -18.7% lower over the quarter and -19.6% lower year-on-year.
The intense level of interest-only lending has been a key risk in the market and new interest-only lending has dropped over the quarter both on a value and share of total basis. Over the quarter there was roughly $10.785 billion in interest-only lending which was recorded as the lowest. As a share of total lending, the interest-only was also at a record low of 14.9% which is a long way from its crest at 45.6% in June 2015. As a proportion of the total portfolio of outstanding loans, interest-only currently represents a record low 23.3% which is down from a pinnacle of 39.5% in June and September 2015.
Interest-only lending isn’t just the only area in which there have been a reduction risker lending. The value of low documentation loans, other non-standard loans and loans that are approved outside of serviceability all fell over the quarter in terms of which both value and their share of total lending. Whereas, in fact at 0.1% of total lending over the quarter, both the other non-standard loans and the low documentation loans were at an historic low share of mortgages while the 4.3% of loans that were approved outside of serviceability was the lowest share since December 2017.
Whereas, most areas of riskier lending recorded a reduction over the past quarter, there was just a slight increase in the share of new mortgages that were written with a loan to value ratio (LVR) of more than 80%. Over the quarter there was roughly $15.772 billion worth of new mortgages with an LVR of more than 80%. Even though that was the lowest value on record, that is more a function of reduced overall demand for mortgages. The share of these mortgages with an LVR that’s in excess of 80% was recorded at 21.8% over the quarter which was its highest share since March 2017. The share of these higher LVR loans will still below its peak of 37.6% in March 2009 and most new borrowers will then have more than 20% equity in the property they are purchasing. Nevertheless, its just a little surprising that it’s given the current tight credit conditions and falling dwelling values that there is an increased willingness to lend to borrowers with just less than a 20% deposit.
Overall, the data reflects with the ongoing improvements in mortgage quality and the shift towards reducing the build-up of these risks that are in the mortgage market. We would expect the current conditions to continue over the next quarter. Thereafter it will be very interesting to see what’s happened given that there has been an interest rate cut and it’s looking as if APRA will be relaxing some of the serviceability limits in place on mortgages. On the other side of things, comprehensive credit reporting is being implemented which is likely to mean even more scrutiny on borrower’s debts and subsequently increased pressure on lenders to write high quality mortgages.