RBA deputy governor Philip Lowe: "My subjective assessment would be the level of risk in bank mortgage portfolios has risen over the past couple of years." Photo: Dominic Lorrimer

The Reserve Bank of Australia believes restrictions on bank lending to stop a property boom are only having a small effect and it remains worried about banks' and investors' exposure to Australia's property market.

After five months of public and private pressure to cut back on lending that seemed to be resisted by the banks, the Australian Prudential Regulation Authority demand to limit growth in investor loans to 10 per cent is changing the banks' lending policies, Reserve Bank deputy governor Philip Lowe said.

"Changes made by banks to date might stop the fringe investor but … they are not going to have much of an impact." 

James Austin

"My conversations with a number of banks around the country [suggest] the various APRA measures are having an effect," he said. "The measures so far seem to be having a positive albeit modest effect and it is worthwhile seeing how those play out.

"My subjective assessment would be the level of risk in bank mortgage portfolios has risen over the past couple of years."

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The big banks this month cut interest rate discounts, are requiring larger deposits and have toughened credit assessments.

Despite the Reserve Bank's confidence in APRA's measures, a growing number of brokers, economists and bankers believe that additional regulatory action will be necessary to take the heat out of property markets in parts of Sydney and Melbourne.

"Changes made by banks to date might stop the fringe investor, but in the scheme of things, they are not going to have much of an impact on the flow of funds into the housing sector," said the chief financial officer of non-bank lender Firstmac, James Austin.

Credit to investors accelerated

JPMorgan chief economist Stephen Walters said he was not convinced the curbs on investor lending were enough to relieve the risks in the housing market. He said that since the APRA revealed its limit on investor lending in December, credit to investors had accelerated and the housing market heated up further.

"On balance from what we know now, things have actually got hotter, not cooled down," he said.

While he said it was still early to determine the impact of APRA's measures with any certainty, he predicted more stringent curbs on lending would be needed. "I think they will probably have to do some firmer things than they've already done," he said.

Mortgage brokers suggest banks will start to closely examine particular post codes and apply more stringent assessments in those areas to limit risks.

"What I am hearing on the grapevines is that banks are getting a lot more sophisticated and using postcodes to segment lending and reduce their exposure to some market," Smartline mortgage brokers director Joe Sirianni said.

Mortgage Choice boss John Flavell said he expected to see a "raft of price and policy changes in the coming days and weeks".

Dismissing suggestions the lending limits were put in place to let the Reserve Bank cut interest rates further, Dr Lowe said they had been designed "to make sure the banking system is adequately dealing with a rising risk in mortgage loan portfolios."

Rise in loans outside banking sector

He said restrictions on banks had their limits and could push more lending outside the banking sector. Non-bank lenders such as FirstMac and Pepper were prolific lenders in the lead-up to the financial crisis and are once again, accessing funding from wholesale markets in large volumes.

"This is an issue very clearly on our radar screen – how far you can push tighter regulation of the banking system without causing the same loans to be made by different financial intermediaries," he said.

"At the moment I don't think this is really a first order issue … it is very much at the margin. But it is a margin we do have to watch very carefully and history tells us that if you make the incentive too misaligned [between] banks and non-banks, funding will flow to non-banks – and we need to watch it."

Firstmac's Mr Austin said property investors borrowing from the banks were not looking outside the banks for credit. "There has been discussion that we might see some investment flow into the non-bank sector as a result of the changes, and we are monitoring that closely but we have not seen anything at all."

Dr Lowe warned Australians to take caution investing in housing. "It is entirely appropriate that households are careful as well because the level of risk there, while I don't think it is extreme, it has picked up and both financial institutions and households need to respond to that," he told a Thomson Reuters conference in Sydney.

"Household debt is high, property prices are very high, household income growth is slow, the unemployment rate has drifted up – all those things would suggest there has been an increase in the level of risk, particularly as people have bought property for investment purposes.

"In that environment, it is entirely appropriate [the banking regulator] APRA has a very close dialogue with financial institutions about the risks in those portfolios, and makes sure there are plenty of buffers there in case things don't turn out so well."

Pre-emptive measure

Lending limits have been viewed as a pre-emptive measure to provide more scope for the central bank to cut interest rates to stimulate economy growth by reducing borrowing costs and weakening the Australian dollar. But Dr Lowe downplayed this objective.

"If it helps us get better balance between monetary policy and prudential policy, that is a side effect. But the primary objective is to make sure the banking system is dealing appropriately with an increase in the level of risk."

However, economists said the policy's effectiveness could still have some impact on rate decisions.

Westpac senior economist, Matthew Hassan said that if the APRA policies did take some heat out of the housing boom, it may give the central bank more "comfort" about risks in the property market.

"To the extent that it gives them more comfort that they are not going to drive risks around overheating, it does give them a bit more scope. But the commentary we are seeing today indicates that it is not the main game for policy," he said.

In response to speculation around the timing of a rise in US interest rates, Dr Lowe said even though markets have had plenty of time to adjust to a tightening cycle there would be volatility even though such a move would be prompted by a stronger US economy, which is good for global growth.

"The Fed will raise rates when the US economy is strengthening [and] any sign the US economy is strengthening is good news for us all. No doubt when the Fed raises interest rates, there will be some market turbulence but it is very well telegraphed and people have had plenty of time to adjust.

"At some point, when they raise interest rates the US dollar will strengthen against the Australian dollar and that is something we would welcome, as we have said a number of times."

with Jonathan Shapiro and Larry Schlesinger