Financial Stability

<html><body>
The risks to financial stability from falling housing prices in Sydney and Melbourne have abated, according to the Council of Financial Regulators (CFR).
The CFR is the coordinating body for Australia's main financial regulatory agencies.
There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA).
It is a non-statutory body, without regulatory or policy decision-making powers.
At its meeting on 18 September 2019, the Council discussed risks facing the Australian financial system, regulatory issues and developments relevant to its members.
The topics discussed included the following:
<ul>
<li>
Financing conditions and the housing market Council members discussed credit conditions and recent developments in the housing market. Housing credit growth has been subdued, particularly growth in credit to investors. The major banks have seen slower growth relative to other lenders. Subdued credit growth has been primarily driven by weaker credit demand, though loan approvals have picked up recently. The potential for risks to financial stability from falling housing prices in Sydney and Melbourne has abated somewhat, with prices rising in the past few months. In contrast, prices have continued their prolonged decline in Western Australia and the Northern Territory and so the prevalence of negative equity for borrowers in those regions has continued to rise. The Council also discussed the continuing tight credit conditions for small businesses, with little growth in credit outstanding over the past year. The Council will continue to closely monitor developments. Members discussed progress with updating the guidance regarding responsible lending provisions in the National Consumer Credit Protection Act 2009. The updated guidance should provide greater clarity about what is required for a lender to comply with its obligations, taking into consideration enhancements to lending practices, the impact of competition from new market entrants, as well as enhanced access to and usage of consumer credit data and technological tools. 
</li>
<li>
Policy developments APRA provided an update on a number of policy initiatives, including changes to the related entities framework for banks and other ADIs and proposals to strengthen remuneration requirements across all APRA-regulated entities. The proposed remuneration requirements seek to better align remuneration frameworks with the long-term interests of entities and their stakeholders, and incorporate a recommendation from the Royal Commission on limiting remuneration based on financial metrics. APRA briefed members on the outcomes of its capability review. 
</li>
<li>
Superannuation fund liquidity The Council considered arrangements for managing liquidity at superannuation funds during periods of market stress. They noted that arrangements had operated as intended during the financial crisis and had since been strengthened. They agreed that existing arrangements provide an appropriate incentive for superannuation funds to manage their liquidity and that circumstances where a systemic liquidity problem could arise for the superannuation system were highly unlikely. Members concluded that no additional measures, including access to liquidity from the Reserve Bank, were warranted.</li>
</ul>
</body></html>

j.ballantyne1990-6AQqhLzZaK

Falling housing prices in Sydney and Melbourne are less likely to be a risk to financial stability: CFR

jrobinson-rf4aSBido9

Financial stability through the lense of business: RBA's Michele Bullock

<html><body>
Large housing price falls in parts of Australia mean some borrowers are facing negative equity – where the outstanding balance on the loan exceeds the value of the property it is secured against.
Negative equity creates vulnerabilities both for borrowers and lenders, the RBA recently noted in a research paper.
A borrower having difficulty making loan repayments who has negative equity cannot fully repay their debt by selling the property.
Negative equity also implies that banks are likely to bear losses in the event that a borrower defaults.
Evidence from Australia and abroad suggests that borrowers who experience an unexpected fall in income are more likely to default if their loan is in negative equity, the RBA financial stability review indicated.
"At present, the incidence of negative equity remains low," the report said.
"Given the large increases in housing prices that preceded recent falls and the decline in the share of mortgages issued with high loanto-valuation ratios (LVRs), housing prices would need to fall significantly further for negative equity to become widespread.
"However, even if this did occur, increased defaults would be unlikely if the unemployment rate remains low, particularly given the improvements in loan serviceability standards over recent years.
"Few loans are currently in negative equity despite sizeable housing price declines Estimating the share of borrowers with negative equity requires data on current loan balances and property values."
The RBA’s Securitisation Dataset contains the most extensive and timely data on loan balances and purchase prices.
These data can be combined with regional data on housing price movements to estimate the share of loans that are currently in negative equity.
This suggests that nationally, around 2.75% of securitised loans by value are in negative equity (just over 2% of borrowers).
The highest rates of negative equity are in Western Australia, the Northern Territory and Queensland, where there have been large price falls in areas with high exposure to mining activity.
Almost 60% of loans in with negative equity are in Western Australia or the Northern Territory. Rates of negative equity in other states remain very low (Graph B1).
<img src="https://www.urban.com.au/images/2019/4/12/Negative%20Equity%201.JPG" alt="">
Estimates of negative equity from the securitisation dataset may, however, be under or overstated, the RBA financial stability review acknowledges.
"They could be understated because securitised loans are skewed towards those with lower LVRs at origination.
"In contrast, the higher prevalence of newer loans in the dataset compared to the broader population of loans, and not being able to take into account capital improvements on values, will work in the other direction."
It noted some private surveys estimate closer to 10% of mortgage holders are in negative equity.
However, these surveys are likely to be an overestimate for a number of reasons; for instance, by not accounting for offset account balances. Information from bank liaison and estimates based on 2017 data from the Household Incomes and Labour Dynamics of Australia (HILDA) survey suggest rates of negative equity are broadly in line with those from the Securitisation Dataset.
The continuing low rates of negative equity outside the mining exposed regions reflect three main factors: the previous substantial increases in housing prices; the low share of housing loans written at high LVRs; and the fact that many households are ahead on their loans, having accumulated extra principal payments.
Housing prices in some areas of Sydney and Melbourne have fallen by upwards of 20% from their peak in mid to late 2017.
But the RBA review noted only a small share of owners purchased at peak prices, and many others experienced price rises before property prices began to fall.
Properties purchased in Sydney and Melbourne since prices peaked account for around 2% of the national dwelling stock.
Looking further back, properties purchased in these two cities since prices were last at current levels still only account for around 4½% of the dwelling stock.
Few recent borrowers had high starting LVRs.
Over the past five years, the share of loans issued by ADIs with LVRs above 90 has roughly halved.
Since 2017, it has averaged less than 7% (Graph B2).
Around 80% of ADI loans are issued with an LVR of 80 or less. Around 15% of owner-occupier borrowers and 20% of investors take out a loan with a starting LVR of exactly 80.
<img src="https://www.urban.com.au/images/2019/4/12/Negative%20Equity%202.JPG" alt="">
Given most borrowers do not have high starting LVRs, housing price falls need to be large for widespread negative equity.
The review noted only 15% of regions have experienced price declines of 20% or more from their peaks.
Around 90% of these regions are in Western Australia, Queensland and the Northern Territory.
"If a borrower has paid off some of their debt, then price declines will need to be larger still for them to be in negative equity.
"Most borrowers have principal and interest loans that require them to pay down their debt and many borrowers are ahead of their repayment schedule."
Around 70% of loans are estimated to be at least one month ahead of their repayment schedule, with around 30% ahead by two years or more.
When a borrower is behind on repayments and their loan is in negative equity, banks classify the loan as ‘impaired’.
Banks are required to raise provisions against potential losses from impaired loans through ‘bad and doubtful debt’ charges.
Currently the proportion of impaired housing loans is very low, at 0.2% of all residential mortgages, despite having increased of late (Graph B3).
<img src="https://www.urban.com.au/images/2019/4/12/Negative%20Equity%203.JPG" alt="">
Negative equity is concentrated in Western Australia, Queensland and the Northern Territory
Queensland, Western Australia and the Northern Territory together account for around 90% of all mortgage debt in negative equity.
These states have regions that experienced large and persistent housing price falls over several years.
"This has often been coupled with low income growth and increases in unemployment, which have reduced the ability of borrowers to pay down their loans," the RBA financial stability review indicated.
"Loans currently in negative equity were, on average, taken out around five years ago and had higher average LVRs at origination, of around 85%.
"This made them particularly susceptible to subsequent falls in property values."
Investment loans are also disproportionately represented, despite typically having lower starting LVRs than owner-occupier loans.
Investors are more likely to take out interest-only loans in order to keep their loan balance high for tax purposes.
Around 10% of loans in negative equity have interest only terms expiring in 2019, which is double the share for loans in positive equity.
For these borrowers, the increase in repayments from moving to principal and interest may be difficult to manage, especially as loans in negative equity are already more likely to be in arrears.
Having more borrowers in this scenario is distressing for the borrowers themselves and for the communities they live in.
However, it is unlikely to represent a risk to broader financial stability given it remains largely restricted to mining-exposed regions, which represent a very small share of total mortgage debt.
Further significant housing price falls in Sydney and Melbourne would see negative equity increase, but widespread defaults are unlikely, the RBA financial stability review suggested.
Continued housing price falls would be expected to increase the incidence of negative equity, particularly if they affect borrowers with already high LVRs.
Around 11/4% of loans by number (and 13/4% of loans by value) have a current LVR between 95 and 100, making them likely to move into negative equity if there are further housing price falls (Graph B4).
However, compared to the international experience with negative equity during large property downturns, the incidence of negative equity in Australia is likely to remain low.
Negative equity peaked in the United States at over 25% of mortgaged properties in 2012 and in Ireland it exceeded 35%, as peak to trough price falls exceeded 30 and 50% respectively.
However, high origination LVRs were far more common in these countries than they have been in Australia.
Even if negative equity was to become more common in the larger housing markets of Sydney and Melbourne, impairment rates for banks are unlikely to increase significantly while unemployment and interest rates remain low.
<img src="https://www.urban.com.au/images/2019/4/12/Negative%20Equity%204.JPG" alt="">
</body></html>

Around 30% of Australian mortgage holders are ahead by two years or more: RBA

<html><body>
There's been plenty of speculation about the looming cliff faced by the interest only borrowers who are due to have their loans reset to the pricier principal and interest loans.
It comes as large price falls in some parts of Australia has meant some borrowers are facing negative equity – where the outstanding balance on the loan exceeds the value of the property it is secured against.
While this negative equity creates vulnerabilities both for borrowers, especially if they are selling, and their lenders, the Reserve Bank of Australia (RBA) recently noted it doesn't anticipate risk to the financial stability of the economy.
Certainly nothing like the impact of negative equity peaks in the United States at over 25% in 2012 and in Ireland at 35%, as prices fell 30 and 50% respectively.
The RBA noted around 10% of loans in negative equity have interest only terms expiring in 2019.
Loans currently in negative equity were, on average, taken out around five years ago and had higher average Loan to Value Ratios (LVRs) at origination, of around 85%.
For these borrowers, the increase in repayments may be distressing for the borrowers and for the communities they live in.
The RBA research shows that negative equity is concentrated in Western Australia, Queensland and the Northern Territory, largely restricted to mining-exposed regions.
These locations account for 90% of mortgage debt in negative equity.
The RBA maintains the low rates of negative equity outside the mining-exposed regions reflect three factors: the previous substantial increases in prices; the low share of loans written at high LVRs; and the fact that many households are ahead on their loans.
The RBA cautions that further significant housing price falls in Sydney and Melbourne would see negative equity increase, but widespread defaults are unlikely, the RBA financial stability review suggested.
Any increase the incidence of negative equity will only arise with those high LVR borrowers.
Across Australia, around 11% of national loans have a current LVR between 95 and 100%.
Housing prices in some areas of Sydney and Melbourne have fallen by close to 20% from their 2017 peak.
But the RBA review noted only a small share actually purchased at peak prices, and many experienced rises before prices fell.
Properties purchased in Sydney and Melbourne since prices peaked account for 2% of the national dwelling stock.
Properties purchased in these two cities since prices were last at current levels only account for 4.5% of the dwelling stock.
Few recent borrowers have had been allowed loans with high LVRs.
In fact, over the past five years, the share of loans with LVRs above 90% has halved.
Since 2017, it has averaged less than 7%.
Around 80% of loans are issued with an LVR of 80% or less.
Given most borrowers do not have high LVRs, housing price falls will need to be larger for widespread negative equity.
Of course, if a borrower has also paid off some of their debt then price declines will need to be larger still.
Around 70% of loans are estimated to be at least one month ahead, with 30% ahead by two years or more.
When a borrower is behind on repayments, banks classify the loan as impaired.
Currently the impaired housing loans rate sits at 0.2% of all mortgages. 
This article first appeared in The Daily Telegraph. 
</body></html>

jchancellor-FAypfDUnLy

Australian negative equity remains below 2% of borrowers: RBA

<html><body>
Housing markets remain weak, particularly in Melbourne, Sydney and Perth, according to last week's meeting of the Council of Financial Regulators.
The group meets quarterly to discuss systemic risks facing the Australian financial system, regulatory issues and developments relevant to its members.
However, the council suggested the adjustment in housing prices and activity has been orderly and did not raise material financial stability concerns.
Housing prices nationally have fallen by 6.5% over the past year, but this has followed a period of large price gains in some areas.
Further, the improvement in banks’ lending standards – including a lower share of high loan-to-valuation ratio lending – means that households and lenders generally are less vulnerable to falling housing prices than in the past, it noted.
Despite historically high household debt, signs of financial stress remain relatively contained given a strong labour market and low interest rates.
The Council noted that while mortgage arrears rates remain low, they have reached a post-financial crisis high.
"This largely reflects regional conditions," the minutes suggested.
It concluded overall that future paths of housing activity and prices remain uncertain.
The Council discussed the slowdown in housing credit growth and the weaker conditions in the housing market.
Members agreed the evidence from data and consultations with banks indicated that the slowing in credit largely reflects weaker demand, particularly from investors.
There has also been some tightening of credit supply over the past year as lenders have applied their lending policies more stringently and undertaken more detailed scrutiny of borrowers’ expenses and other liabilities.
It noted there remains strong competition for borrowers of low credit risk.
The Council agencies will be closely monitoring the extent of any further adjustments, and in particular the ongoing availability of credit.
It also noted members observed that new lending to small businesses has slowed over the past year.
"For many small businesses, personal and business finances are intermingled," the report said.
"As a consequence, the higher standards that lenders apply to personal borrowing are affecting some small business loan applications.
"Further falls in housing prices could constrain small business borrowing, given that around half of loans to unincorporated businesses are secured by residential property."
</body></html>

Financial Stability

Editor's Picks

Have something to contribute?

Developments

New apartments

New townhouses

News

Financial Stability

Editor's Picks

Receive the latest news stories to your inbox

Have something to contribute?

Developments

New apartments

New townhouses

News