March 2, 2018 / 8:17 AM / in 6 months

Australia's banking watchdog flags end of investor credit cap

SYDNEY (Reuters) - Australia’s banking regulator is considering removing a cap on loans designed to curb speculators from driving a debt-fuelled bubble in the country’s property market.

Wayne Byres, chairman of Australian Prudential Regulation Authority (APRA), speaks at a panel of regulators in Sydney, Australia, September 8, 2017. REUTERS/Jason Reed

Australian Prudential Regulation Authority (APRA) Chairman Wayne Byres told a parliamentary committee on Thursday the 10 percent annual limit it set on investor credit last year was “probably reaching the end of its useful life”.

The tighter regulations, which also include a 30 percent cap to new interest-only loans, have helped slow down lending and cool prices.

Home values across Australia’s major cities fell for a fifth straight month in February with the once red-hot Sydney market now offering negative returns.

Investor loan growth was now well below 5 percent, half the rate in 2014, the regulator said. New interest-only loans had fallen by a third to about 20 percent.

“We think the quality of lending the banking system is doing today is certainly higher and better than it was a few years ago,” Byres said.

“The general dynamics in the market suggest it (the cap) is potentially becoming redundant, although there are some institutions still growing quite quickly.”

Removing the cap would allow the banks to increase the number of investor loans they write, stimulating credit.

But looming new capital rules will allocate more risk and capital to investor loans, potentially more than offseting the impact of any rollback of the cap.

On Friday, Westpac said it would raise rates by 1-25 basis points for all types of fixed-rate mortgages, with effect from March 7.

“These changes align with our goal to manage revenue, growth, margin, portfolio composition and risk,” a Westpac spokesperson said.

Australia’s major banks, Commonwealth Bank (CBA.AX), National Australia Bank Ltd (NAB.AX), Australia and New Zealand Banking Group (ANZ.AX) and Westpac Banking Corp (WBC.AX), last year controversially cited tighter lending rules to justify mortgage rate increases.

The so called “Big Four” control 80 percent of the lending market and have posted record profits for years. They have been mired in controversy and scandal recently, including allegations of interest-rate rigging.

Out-of-cycle mortgage rate rise, one that is not in tandem with moves in the official cash rates, have generated the biggest public outcry, as home-owners struggle to meet high repayments in the face of sluggish wage growth.

The banks reported a combined net profit of A$31.5 billion ($24.4 billion) in the 2017 fiscal year, up 6.4 percent on a year ago, according to KPMG.

Reporting by Paulina Duran; Editing by Stephen Coates & Shri Navaratnam

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