Lending caps aren’t going anytime soon after APRA said they would stay until household debt levels stabilise.
In response to complaints by smaller lenders that the restrictions disadvantage them, the prudential regulator has recommended they cut costs to remain competitive with the larger banks.
Chairman of the Australian Prudential regulation Authority Warren Byres this week gave an address to building societies and credit unions and told them household debt needs to stabilise and lending standards need to increase before restrictions are lifted.
“For those of you who chafe at the constraint, their removal will require us to be comfortable that the industry’s serviceability standards have been sufficiently improved and crucially, will be sustained,” he told Brisbane’s Customer Owned Banking Convention conference.
“We will also want to see that borrower debt-to-income levels are being appropriately constrained in anticipation of eventually rising interest rates.”
Currently, APRA’s restrictions cap investor loan growth at 10 per cent and interest-only property loans are capped to 30 per cent of new residential loans. It has led to a decline in interest-only loans to around 15 per cent of all new mortgages after being as high as 35 per cent.
APRA chair Mr Byres said that regulation intervention was required after lending standards were actually sliding despite high house prices, low interest rates, weak income growth and rising household debt which he says should normally see lenders tightening standards on their own.
Mr Byres said that banks had decided to try and increase their market share instead of putting prudence as their number one priority.
Mr Byres said smaller lenders should aim to cut costs to stay competitive with the big banks in the wake of the restrictions.
“If the mutual sector could just halve the cost gap with the major banks for example, it could potentially be able to generate a very similar return on assets, changing the competitive dynamics considerably,” he said.