APRA told the federal Inquiry into Home Ownership that while Australia’s banking and housing system has historically been solid, risks have emerged and things can change quickly.
Australia’s share of non-performing housing loans has been extremely low by international standards since the Reserve Bank of Australia began collecting data nearly 20 years ago, according to APRA’s submission.
“However, in APRA’s view, the current economic environment for housing lenders is characterised by heightened levels of risk, reflecting the combination of historically low interest rates, high household debt, subdued income growth, unemployment that has drifted higher, significant house price growth and strong competitive pressures,” it said.
“Moreover, recent experience from around the world shows it is unwise to be complacent about imbalances that can build in the housing sector.”
APRA said that it has “sought to turn up the dial of supervisory scrutiny” on Australia’s banks, which have had to demonstrate what they are doing to manage their risk profiles.
The larger banks have been given specific feedback on areas that need strengthened policies or practices, according to APRA.
The regulator added that it is in the process of writing to individual banks to confirm agreed plans and revised polices and, where necessary, timetables for action.
APRA said that while it is too early to be certain, the early evidence suggests it has had some success in moderating the behaviour of banks pursuing higher-risk strategies.
Another positive sign is that the growth in investor lending may now have stopped, according to APRA. Investor loans generally carry more risk than loans to owner-occupiers.
APRA said it will monitor the impact of its initiatives and would consider taking further measures to ensure that emerging risks are contained.
Such measures could include tightening lending standards, setting limits on particular types of higher-risk lending and forcing more aggressive banks to hold more capital, APRA said.
APRA also said it is “likely to act sooner rather than later” on the recommendation of the 2014 Financial System Inquiry to raise capital requirements for housing loans held by the largest banks.