Australian Prudential Regulation Authority sees no systemic stress with home loans

Australia’s banking regulator said the ramp up in interest rates that’s caused pockets of stress in the nation’s housing market isn’t becoming more widespread.

“We haven’t seen systemic stress at this point,” Australian Prudential Regulation Authority chair John Lonsdale said at the Citi Australia & New Zealand Investment Conference in Sydney on Thursday.

The overall fundamentals of the banking system are “very strong” despite some “pockets of stress” among borrowers. Still, he said data doesn’t fully capture the sacrifices people have made as cost of living pressures bite.

The nation’s central bank last week said a small but rising share of borrowers are on the cusp or early stages of financial stress. Australian home prices stayed strong in September, driven by buoyant demand.

APRA is closely monitoring data on borrowers who took out mortgages at lower, fixed rates and were moving to higher variable rates over the next 12 months, Mr Lonsdale said.

Household mortgage payments now sit at almost 10 per cent of disposable income, up from around 7 per cent in May last year when the RBA began hiking rates, the RBA has said.

“There is definitely stress in the community and we need to be very aware of that,” Mr Lonsdale said.

APRA said the 3 per cent serviceability buffer that banks need to apply on top of the existing mortgage rate to assess domestic borrowers’ capacity to meet repayments is appropriate for the current environment.

Meanwhile, Mr Lonsdale said 11 Australian banks had passed a round of stress testing in the wake of overseas banking turmoil. He said the full results would be published early next year.

Banks were tested in a “severe scenario” of high inflation, unemployment rising to 10 per cent and house prices falling more than a third, he said.

“What I can tell you now is that no banks breached their prudential requirements on capital, all retained sufficient liquidity and banks continued to provide credit to households and businesses,” he said, noting it was a hypothetical exercise, but the results should give confidence in Australia’s banking system’s resilience.