Australia's banking regulator has cautioned banks not to extend credit too freely as Australia's big banks offer their lowest-ever fixed-rate housing loans.
Australian Prudential Regulation Authority chairman Wayne Byres, speaking at a Committee for Economic Development lunch at the Hilton Hotel in Melbourne on Thursday, said APRA was watching the record-low cost of borrowing "very carefully".
"The Australian banking system clearly has a concentration risk in housing, said Mr Byres. "If anything was to go wrong with the housing market it would have a very severe impact on the viability of the housing system. It's naturally something that we watch very carefully.
"We recently put out to banks some additional guidance on how we thought housing and mortgage-related risks should be appropriately managed.
"We also asked the [chairmen] of ... the major institutions to provide us with feedback on how each of those boards was monitoring the risks in their portfolios.
"At this stage our message has been we're watching this very closely, we want to be make sure you're fully on top of what you're doing.
"Competition pressures are there and that's a good thing but we just don’t want it to get too far out of whack."
Brian Hartzer, the chief executive of Westpac – another guest speaker at the lunch – said "the last thing that we want to have happen is a major credit event ... we have no interest in creating a risky portfolio.
"We've been very active in looking at concentrations and potential areas where risk could increase and making sure that we limit our exposure in those areas."
Mr Byres also urged caution in the use of macro-prudential tools – counter-cyclical devices that enable banks to save funds in economic booms for use in lean times. Capital buffers and minimum core funding ratios were two examples.
Such tools should be used to help banks stay healthy, not to influence economic outcomes, he said.
"Are you concerned about making sure that banks stay resilient? Or are you trying to do things that are influencing the level of house prices, influencing the level of the share market, influencing the level of the currency? Clearly that is something that the (Murray) Inquiry needs to think more about."
MEANWHILE, Credit Suisse analyst Damien Boey published new research highlighting the dilemma facing the Reserve Bank – any attempt to cool the housing market by raising interest rates will hurt highly-indebted households and threaten to slow the economy.
Mortgage payments currently made up 21 per cent of household disposable income, it said, compared with a peak of 23 per cent during the global financial crisis.
Mr Boey argued that households' sensitivity to interest rate changes meant the central bank was unlikely to raise the cash rate above 3.5 per cent, compared with the current 2.5 per cent.
"It would only take 100 basis points of rate hikes to bring the debt-servicing ratio back to GFC highs, which we view as unsustainable," he said in a note to clients.
