In an address to the European Australian Business Council in Melbourne, chair of the Australian Prudential Regulation Authority (APRA) Mr Byres stressed the importance of preventative regulatory action to mitigate financial stability risks.
Among the preventative measures flagged by Mr Byres was the regulation of residential mortgage lending.
Mr Byres pointed to the temporary curbs implemented (since removed) by APRA n 2014-15, which capped investor and interest-only lending growth.
The APRA chair said that the regulator had intervened because the banking system “was not responding prudently” to an environment of “high house prices, high household debt, low interest rates and subdued income growth”.
“Speculative activity was increasingly prominent. Such an environment would, one might think, see prudent bankers trimming their sails and battening down the hatches,” he said.
“Instead, intense competitive pressures across the industry saw a tendency for standards go by the wayside – for lenders, it was full steam ahead.
“We therefore felt it necessary to intervene quite firmly to drive standards back to more prudent levels, in keeping with the external environment.
“In parallel, the Australian Securities and Investments Commission (ASIC) intensified its focus on responsible lending.
“The result has been, in recent years, a much more disciplined approach to lending.”
However, Mr Byres said that while lending standards have become “more robust”, the “original risks” that prompted APRA’s intervention in 2014-15 remain present.
“It is worth remembering that the original risks we were concerned about in 2014 – high prices, high debt, low interest rates and subdued income growth – have not gone away, and in some cases increased,” he said.
In light of this, Mr Byres warned against a return to the behaviour that led to the initial crackdown on residential mortgage lending standards, particularly amid stimulus from the Reserve Bank of Australia (RBA), which could trigger a new wave of speculation.
“When it comes to the supply of credit, it would therefore be unwise for lending standards to be allowed to erode again as a means of generating lending growth,” he said.
“[On] the demand side, it would be unhelpful if recent (and prospective) interest rate reductions led to a resurgence in speculative activity.”
Over the past few months, some market indicators have signalled a return to positive lending and housing market conditions.
According to the latest Lending to Households and Businesses data from the Australian Bureau of Statistics (ABS), the value of home loan approvals increased by 5.1 per cent (seasonally adjusted terms) in July – the largest monthly increase since March 2015.
The latest property price data from CoreLogic also revealed that national home values increased by 0.8 per cent in August – the first monthly increase since April 2017.
CoreLogic’s head of research, Tim Lawless, has said that the improvement in housing market conditions could “potentially turn into a ‘V-shaped’ recovery”.
Mr Lawless said that regulators would be monitoring trends in the property sector, adding that they may consider a fresh wave of macro-prudential measures if prices, particularly in Sydney and Melbourne, accelerate beyond expectations.
“No doubt, policymakers and regulators will be monitoring the housing market indicators very closely over the coming months,” he said.
“At the outset, it appears that a rapid recovery would confirm that low interest rates and a loosening in credit policy is reigniting some market exuberance, despite housing affordability remaining a significant challenge, rising unemployment, low wages growth and near record high levels of household debt.
“If the strong rises in values continue over coming months, we would not be surprised to see a new round of macro-prudential policies introduced in order to keep debt levels in check and encourage spending in other areas of the economy.”
