APRA watching commercial property lending for prudence

Scrutiny of commercial property lending has been "dialled up", the Australian Prudential Regulation Authority chairman Wayne Byres said yesterday.

Commenting on the 10 percent growth cap imposed on bank investor loan portfolios - with actual rates of growth sitting at around half that rate - Byres advised the cap, initially announced in December 2014, was "always intended to be temporary [and] it is still our view that it will be temporary, so we are certainly thinking about the next evolution of what we do". 

But Mr Byres said "there is no doubt we have dialled up the intensity of our focus" on commercial property lending.

He was at an event at the Actuaries Institute. 

"In the history of banking, commercial property has always been front and centre whenever there have been any serious issues in the system. So it is natural that at times when valuations look to be on the high side, we are making sure the lending quality of the banks and the basis on which they are assessing credit is maintaining a healthy degree of prudence about it." 

The challenge when monitoring commercial lending is that it is less homogenous than standard housing loans, but "it is natural at this part of the cycle that supervisors are going to pay particular attention to it." 

At the same time APRA announced the investor lending caps, it also said banks should assess borrowers' capacity to pay their mortgages using an interest rate buffer of at least 2 per cent more than the actual interest rate on the loan, with a floor lending rate of at least 7 percent. 

Mr Byres said these rules are working well. "The 7 percent number is a useful mechanism to keep serviceability standards at a certain level and not have those serviceability standards shift with general interest rate movements up and down," he said.  

At the same event, National Australia Bank's global head of research Peter Jolly said residential house prices had been driven by low mortgage interest rates, foreign demand from Chinese buyers, and population growth outstripping supply of residential dwellings. He said the second and third of these drivers were now waning.

But Mr Jolly warned that the ratio of Australian household debt to GDP was the highest in a recent analysis by the Bank of International Settlements of 40 major economies. 

"There is no way to get around the fact that Australian households are very leveraged on any reasonable measure. The reality is pretty stark that household debt is high....There is no doubt in my mind that affordability may be around average, but households are a bit more vulnerable to either interest rates going up - which doesn't seem likely - or an interruption in their income," he said.  

"In the history of banking, commercial property has always been front and centre whenever there have been any serious issues in the system. So it is natural that at times when valuations look to be on the high side, we are making sure the lending quality of the banks and the basis on which they are assessing credit is maintaining a healthy degree of prudence about it.

He suggested the challenge when monitoring commercial lending was that it is less homogenous than standard housing loans, but "it is natural at this part of the cycle that supervisors are going to pay particular attention to it."