Limp income growth a mortgage stressor

Tepid income growth and the inevitability of a return at some point to higher (and more typical) levels of interest rates are among the darker thoughts informing the more assertive actions on Australia's banking regulator with regard to home lending.

Wayne Byres, chair of the Australian Prudential Regulation Authority, used a speech to the Australian Business Economists in Sydney yesterday to survey his thinking on a topic leading to extensive reshaping of loan products and business models in the sector.

"High and increasing levels of debt have been manageable for households because, amongst other things, interest rates are now at historically low levels," Byres reminded his audience.

"If housing interest rates returned to anything like long-term averages, the interest burden would begin to look quite high," he said.

He pointed out that "we are also in an environment of subdued income growth. Household income growth has been relatively low over the past couple of years, and is now broadly in line with underlying inflation - implying minimal growth in real terms, and limited capacity to support significantly higher debt levels."

Byres reiterated "APRA's concern that, in the face of ample credit and strong competition for new and existing customers for many years, there is the potential for a slow but steady erosion of credit quality."

The environment for housing lending, he said, "is one of relatively high house prices, high household debt, historically low interest rates, and subdued income growth.

"Against such a backdrop, APRA is certainly intensifying its scrutiny of portfolio risk profiles.

"Regardless, lenders should recognise the heightened risks and be doing likewise without too much prompting from us."