The banking regulator has warned Albania’s new government that it will face “increased” risks in the housing market as interest rates rise.
- The banking, insurance and pensions regulator has prepared a dossier for the government entering in May
- The document warned the Albanian government that housing market risks were “increased” due to rising rates
- APRA said banks were well placed to weather a downturn in housing, although ‘a number of households’ would be in ‘financial distress’
The warning came in the new government package prepared for the new Labor government when it took office in May, and was made public following a freedom of information request by the Australian Financial Review.
The 48-page document set out a range of issues that APRA was examining in the banking, insurance and pensions sectors it regulates, but housing came to the fore.
“Risks in housing markets are heightened,” the report warns.
“A prolonged period of historically low interest rates has led to strong house price growth in recent years, which has been high compared to advanced economies around the world. Levels of household debt relative to income are also high, both historically and internationally.”
Even though interest rates had only just started to rise in May when the report was written, APRA warned that more expensive mortgages would put some borrowers in financial difficulty.
“The faster-than-expected emergence of inflationary pressures and a rising interest rate environment is likely to strain household balance sheets and put a number of households in financial difficulty,” he said. he noted.
“Low interest rates have, on the whole, helped borrowers build up substantial mortgage repayment cushions. Nevertheless, a number will experience loan repayment shocks [particularly those on very low fixed rates] as interest rates rise.
“More generally, high interest rates will reduce borrowing capacity, increasing the likelihood of falling house prices in Australia.”
The following sentence was removed from the FOI because it was either an opinion, recommendation or advice, or because it was part of a deliberative process.
Soaring interest rates ‘risk causing housing market to plummet’
Recent figures from CoreLogic show house prices in Sydney have fallen nearly 2% over the past month, with prices in Melbourne also falling sharply and slowdowns emerging in other major cities.
Many economists, including those at big banks, are now predicting more than 15% falls in house prices nationwide, with some warnings about the risk of much larger falls.
AMP Chief Economist Shane Oliver said house prices in Sydney are now falling at their fastest monthly rate since the mid-1980s after a 1.25 percentage point rise in interest rates interest from the Reserve Bank since early May.
“That, combined with falling real incomes, will dampen consumer spending going forward,” he recently warned.
“The rise in the cash rate to the level of around 3.5% expected by the money market risks collapsing the real estate market and therefore the economy.
“So we remain of the view that rates won’t be that high.”
Along with the impact on house prices and households with home loans, APRA warned that commercial property values and loans could deteriorate if rates rise.
“Commercial real estate lending may also be a new area of concern for ADLs, with higher interest rates, supply chain challenges and post-pandemic shifts in working methods and consumer behavior potentially negatively impacting the value of assets in the office and retail sector,” he observed.
“These drivers can play into increasing non-performing loan levels in business lending, including construction.”
Banks should be fine even if property, economy collapses
APRA’s responsibility is to protect financial institutions and their customers against the risk of the collapse of these banks, insurers or pension funds.
It has no explicit responsibility to protect consumers or protect the economy against risks generated by the banking sector, tasks that fall primarily to ASIC and the Reserve Bank respectively.
With this in mind, APRA assured the Albanian government that it was confident that Australian banks could survive a real estate crisis and an economic downturn.
“The banking sector is sound and well placed to absorb a deterioration in asset quality [from housing portfolios, or other sources]”, he maintained.
“While arrears rates are likely to rise as interest rates rise, non-performing loans are currently low and are expected to remain subdued even in times of crisis.
“APRA will continue to actively monitor lending standards and evolving risks in housing markets and review its macroprudential response in consultation with the CFR. [Council of Financial Regulators] agencies.”
Perhaps this strength in the banking sector is what outgoing APRA President Wayne Byres was referring to earlier this week when he announced his early retirement from his post.
“There is always more to do, but the financial system is stable, APRA’s management team is strong, and the organization and its staff are well positioned to continue to manage future challenges,” he said. he said in a statement.
“In this context, I believe the time has come to hand over the role of President to someone new, who will lead the organization in the next stage of its journey.”
Mr Byres was due to complete his current five-year term at the end of June 2024, but will instead step down at the end of October this year.