Loan stress may prompt regulator response

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

 

A new report warns an environment where credit growth is far outpacing income growth is unsustainable and will trigger a response from Australia’s financial regulators.

Moody’s Analytics, which operates independently from the Moody’s Investors Service credit rating agency, estimates that 20 per cent of Australia’s population is under “mortgage stress”.

This is a concern when lending rates are at historical lows.

Mortgage stress is defined as those who pay 30 per cent of household income in mortgage payments.

“An underlying concern is that when interest rates do eventually rise, highly leveraged households need to be able to continue servicing their loans, even if rate increases are forecast to be gradual,” Moody’s Analytics senior economist Katrina Ell says.

She believes the banking watchdog, the Australian Prudential Regulation Authority, is on the verge of intervening in the housing market to cool the spectacular momentum experienced across capital cities.

APRA has previously intervened to curb investor demand for housing.

“Macroprudential tools are particularly useful with sustained low interest rates, because they can target pockets of concern,” she says.

The Reserve Bank of Australia has repeatedly said that interest rates will not rise until inflation is sustainably within the two to three per cent inflation target, an event it does not expect to occur until 2024 at the earliest.

However, there is growing speculation among economists that this could be brought forward to 2023 or even earlier, given the strength of the labour market that has seen the jobless rate rapidly drop to 5.1 per cent.

A meeting of Australia’s Council of Financial Regulators earlier this month agreed that overall lending standards in Australia remain sound.

However, APRA has written to the nation’s largest banks, warning there are signs of some increased risk-taking as home buyers rush to secure loans in a heated housing market.

The council is made up of the RBA, Treasury, APRA and the Australian Securities and Investments Commission.

The RBA will release monthly credit figures for May on Wednesday, which measure the number of existing loans in the economy.

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