RBA FSR: Rising risks – TDS

Analysts at TDS note that the RBA’s semi-annual FSR mentions ‘interest-only’ lending 17 times, earning a special analysis box while the prior report mentioned ‘interest-only’ four times and suggests that this report is a not-subtle threat against rising ‘risky’ investor mortgages.

Key Quotes

“Recent regulatory policies mean well but are poorly targeted, as interest-only macroprudential policies leave the bulk of mortgages unaffected, and hence doesn’t dent the relentless rise in owner-occupied household debt.”

“Whilst cooling investor appetite for housing is welcome, a change in the tax laws would be a far more effective way to eliminate the appetite for interest-only investor loans.”

“We see record owner-occupied household debt being a far bigger threat to macroeconomic stability down the track.”

“Main Financial Stability Review points:

• Vulnerabilities related to household debt and the housing market more generally have increased. Household indebtedness continues to rise and some riskier types of borrowing such as interest-only lending, remain prevalent.
• The Council of Financial Regulators (CFR) has been evaluating the risks to household balance sheets, focusing on interest-only and high loan-to-valuation lending investor credit and lending standards.
• Australian banks are building more resilient liquidity structures. Capital ratios have risen substantially and are expected to increase further once APRA finalises its framework to ensure that banks are ‘unquestionably strong’.
• Concerns that rising global yields means less foreign investor interest in Australian commercial property.
• Strong price growth now risks a larger downswing later.”

“Conclusions

Using APRA’s own data interest-only loans and high-LVR loans should be the least of the CFR’s concerns when it comes to limiting financial stability risks. We are concerned that policies targeting the interest-only/LVR space leaves the bulk of the acceleration in mortgages and household debt untouched and unaffected. While household debt may be held by those who can service the loans, this isn’t necessarily riskless behaviour.

Due to APRA-led increases in capital requirements, expect even more aggressive bank buying of ACGBs, semis and SSAs (the latter for yield, as they are not HQLA) in the medium-term.”