December 18, 2018 / 11:36 PM / 6 months ago

UPDATE 2-Australian bank watchdog lifts cap on interest-only mortgages in downturn

* 30 pct cap on interest only scrapped after 19 months

* New interest-only loans have fallen to 15 pct from 40 pct - RBA

* Royal Commission has shifted focus to bank culture - economists (Recasts, adds analyst and economist reaction, bank shares)

By Byron Kaye

SYDNEY, Dec 19 (Reuters) - Australia’s bank regulator said on Wednesday it was scrapping a limit on the amount of interest-only home loans that institutions could sell, a sign that concerns about an overheated property market have swung to fears of a downturn.

The announcement by the Australian Prudential Regulation Authority (APRA) marks a rapid change of circumstances since it sought to put a brake on rocketing residential property prices by imposing a 30 percent cap on interest-only loans last March.

Interest-only loans have since collapsed to 15 percent of new mortgages, from 40 percent, the Reserve Bank of Australia says. Residential property prices in large Australian cities such as Sydney and Melbourne have fallen the most in three decades.

A high-profile Royal Commission inquiry into finance sector misconduct has encouraged banks to tighten their approvals processes amid accusations that they have flouted responsible lending laws.

“The whole psychology around the property market has changed,” said AMP Capital chief economist Shane Oliver.

“APRA seems to have moved on from these caps towards focusing on more qualitative controls, ensuring that banks are engaged in responsible lending. That was reinforced by the Royal Commission.”

In 2014, APRA made banks limit investor housing loans to 10 percent of new mortgages amid concerns about runaway prices and declining housing affordability. It removed that cap in April.

Interest-only loans are seen as riskier than regular principal and interest loans, as well as being a contributor to rising property prices since they are cheaper to service.

APRA chairman Wayne Byres said in a statement that the caps “have now served their purpose of moderating higher risk lending and supporting a gradual strengthening of lending standards across the industry over a number of years”.

The interest-only cap would disappear from Jan. 1, 2019, but APRA would continue to review lenders’ internal risk controls, he added.

Shares of the four largest banks - Commonwealth Bank of Australia, Westpac Banking Corp, Australia and New Zealand Banking Group Ltd and National Australia Bank Ltd - were up about 1 percent as analysts predicted the move to be a slight positive on the economy.

“We see this as an important signal from the regulators that they are willing to take measures to prevent credit conditions to the household sector from becoming too tight,” said JP Morgan analysts in a client note.

Stephen Koukoulas, a former government economic adviser and managing director of Market Economics Pty Ltd, said the interest-only cap had been “successful, arguably ... too successful”.

Marcel Thieliant, a senior economist at Capital Economics, said removing the cap would attract more investor mortgages “but we doubt that this will result in a near-term stabilisation of the housing market”. (Reporting by Byron Kaye and Paulina Duran; Editing by Sam Holmes and Jacqueline Wong)

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below