The number of risky home loans rose by 26% in the last full quarter, according to industry regulator APRA. In statistics released late last week, it was revealed that more than $21.5 billion was written in loans that the regulator classes as risky in the period ending December 2020.
APRA ranks loans with a debt-to-income ratio of more than six as risky, as well as loans that come with a low deposit – 95% loan-to-value ratio, for example – or interest-only loans for owner-occupiers.
The news comes amid record house prices and record home loan growth, but also in a week where the Senate was discussing reforms proposed by the government that would change responsible lending obligations (RLO) of banks in Australia.
"The idea was concocted in the depths of COVID at the end of last year, when it looked like the economy might tank," said Sally Tindall, Director of Research and Public Relations at RateCity. "The idea was to free up the flow of credit to kick start the economy."
I don't know that the idea of getting consumers to take on more debt and potentially riskier debt to get the economy out of a hole is the best idea, especially if people took out more debt than they could afford to repay."
"Now we are out of the recession, the economy is getting back on track and the flow of credit, particularly in relation to housing, has hit a record height. The value of home lending has never been higher in the ABS records: why would anybody think we need to free up the flow of credit?"
The laws, which are due to be voted on in May, would see significant changes to the roles of regulators like APRA, who released the risky lending figures.
"The concern here is that you have the twin peak model: ASIC with the big stick, looking at individual banks to make sure that everyone is doing the right thing; APRA with a holistic model and less of a stick. To take ASIC out of that equation could mean that there's fewer penalties for banks that don't lend responsibly, and it shifts the onus from the bank to the borrower. I don't know that people are fully equipped to make those decisions alone."
"It really comes down to the banks and how the RLO changes will materialise in their processing systems. The banks have come out and said that they aren’t going to start writing blank cheques. It's not in their interest to lend to people who can't repay, so I don't think it's going to fall to pieces the instant this legislation comes through."
"But where you might see people taking out risky debt might be things like the property market: APRA have a measure of people taking out debts where the value is six times their income. You might see people take on more debt that they can manage at this point in time because interest rates are so low, but as soon as rates rise, they'll feel the squeeze.
"Then there's loans with very small deposits. At the moment, the government are encouraging people to take out home loans with as little as 5% deposit, in a market where property prices are forecast to rise. That's not as big a problem as it would be if prices were forecast to fall. However, we can't tell exactly what is going to happen and that might be seen as risky lending as well."
"The other concern is that, by largely removing ASIC, you're taking away the ability to fine and penalise banks: there'll be less repercussions if banks don't do the right thing. The way that the proposed system is designed to work is that, while ASIC are taken out of the equation, people can still complain to the Australian Financial Complaints Authority, who can issue fines, but are very limited in scope. There's a concern that if something goes bad, consumers won't be able to be compensated as much as they are in the current system."
