APRA reports non-performing loans on the rise

Pete WargentMarch 5, 20170 min read

APRA reported that residential housing loan ADI exposures continued to power on, up to $1.49 trillion in the December quarter (and beyond $1.5 trillion in January).

Owner-occupied loans totalled $971 billion, comprising 65 percent of outstanding residential property exposures, an increase of $86.5 billion or 9.8 percent from the prior year.

Meanwhile, the total of outstanding investor loans was $522.4 billion (the balancing 35 per cent of outstanding exposures), for an increase of $23.5 billion or 4.7 percent from last year.

New investment loan approvals were down by 5.8 percent from the prior year, yet still accounted for a punchy 34.2 percent of total new residential loans. 

Loans to investors appear very likely to be the target of a crackdown as 2017 rolls on.

As I looked at in a little more detail here, each of the major lenders appear likely to be approaching the speed limit for the growth in their mortgage books, including those that have lodged revisions to historical figures (since these will be adjusted for). 

Click to enlarge

Impairment rise for ADIs
I'm not going to provide much detailed analysis or opinion on this site, but it is worth noting the following from APRA's reported headline figures for ADIs.
-impaired facilities and past due items as a proportion of gross loans and advances was 0.92 percent as at Q4 2016 (an increase from 0.86 percent in the prior year);
-specific provisions hit $7.3 billion at Q4 2016, an increase of $0.8 billion or 12.9 percent from the prior year; and
-specific provisions as a proportion of gross loans and advances was 0.24 percent at Q4 2016, an increase from 0.22 percent in the prior year.
To summarise:

Source: APRA 
This should demand your attention, since it indicates that the cyclical low for impairments has now passed. 

Change to new lending
APRA's figures show that riskier "low doc" and other non-standard lending now comprise only a small and decreasing share of the residential mortgage market, which is a positive development.
Furthermore, most new loans have a loan to value ratio (LVR) of 80 per cent or lower, meaning that - theoretically at least - the majority of new buyers have a significant buffer built in to their purchase. 

A potential challenge to this case is that in many instances those using 20 percent deposits have likely sourced their deposits from existing residential property assets, and therefore the risk in such loans may be higher than it appears at first blush. 
Interest-only loans, while accounting for a smaller share of the market than has previously been the case, still represent a very significant chunk of new lending at 36.6 percent (even if the total of interest-only lending for the quarter of $162 billion represents a decrease of 10.5 percent from the prior year).

The inherent risk here is that when these loans reach the end of their interest-only period the repayments may jump higher in the event that the loan cannot be rolled over into a new interest-only period, a point which has aroused the scrutiny of short sellers.
Summarily, residential property exposures now comprise a very significant sum of interest-only mortgages in Australia. 
Source: APRA
If mortgage rates were to rise, of course, then these risks may be multiplied. 

PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and blogger.

His latest book is Four Green Houses and a Red Hotel.

Pete Wargent

Pete Wargent is the co-founder of BuyersBuyers.com.au, offering affordable homebuying assistance to all Australians, and a best-selling author and blogger.
Residential Housing
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