Opening Statement: Financial regulatory framework and home ownership
Thank you for the opportunity to appear today. I am joined by my colleagues Chris Gower, Executive Director – Cross Industry Risk; Sean Carmody, Executive Director – Policy and Advice; and Marion Kohler, General Manager – System Risk.
In brief opening remarks, I would like to outline APRA’s role in the financial system as the prudential regulator, provide an overview of our macroprudential policy settings and give a sense of the context in which APRA operates.
APRA’s role
APRA’s primary purpose is to ensure the safety and stability of the Australian financial system. A stable financial system is essential for a thriving and dynamic economy.
APRA’s mandate in supervising banks is to protect the interests of depositors and to promote financial stability. This objective is critical to the Australian community’s long-term financial well-being – a safe and stable financial system enables households and businesses to confidently borrow, save and invest for the future. We strive to perform our role in keeping with our Statement of Expectations which includes the facilitation of the flow of finance to the economy.
Financial stability is key not only to supporting home buyers in good times, but also to ensuring they can continue to access credit during periods of economic stress. Without a stable financial system, the broader economy and the aspirations of everyday Australians, including first home buyers, would be at greater risk.
What we are seeing
Our most recent data of August 2024 shows that housing loan commitments are tracking upwards, indicating that credit is flowing and accessible, including to first home buyers. Housing credit growth has increased. It is currently running at an annual rate of 5.0 per cent in August 2024, up from 4.3 per cent at the same time last year. 5.0 per cent is broadly in line with the long-run average.1
First home buyers have continued to account for around one in five new housing loans. Again, this is in line with the long-run average.
That being said, there are unique features of the Australian context that APRA watches closely.
Globally, Australia has one of the highest levels of household debt relative to income. Over the past 20 years, household debt to income has risen from around one and a half times income to around two times. Yet, in percentage terms, APRA-regulated banks have more housing loans on their books than most other comparable countries. Around two-thirds of all loans are for housing in Australia. We note that the share of banks’ nonperforming housing loans as a share of total housing loans has gradually increased from around 0.5% in 2016 to around 1% in 2024.
Macroprudential settings
It’s in this context that we set macroprudential policy with an aim to mitigate risks to financial stability at a system-wide level. We take into consideration what we are seeing in the financial system, as well as current interest rates, the economic environment and factors that could impact financial stability such as geopolitical instability.
The publication of APRA’s Macroprudential Policy Framework in November 2021 gave transparency to our macroprudential tools. These include three core tools that work together to ensure that banks are making sound decisions and are calibrated to promote resilience and promote credit availability in times of stress. They are: limits on bank lending, the countercyclical capital buffer and the serviceability buffer.
Limits on banking lending temporarily restrict higher risk lending. There are no such limits currently in place. The countercyclical buffer increases the resilience of the banking sector in times of heightened systemic risk. It sits at 1% of risk weighted assets currently.
The serviceability buffer currently sits at 3%, and exists to ensure that banks lend to borrowers able to repay their loans in a range of scenarios. The buffer provides an important contingency for a range of economic shocks – not only for rises in interest rates - over the life of the loan. It also factors in unforeseen changes in a borrower’s income or expenses, which we have seen play out recently as cost-of-living pressures mount.
All of these policy settings also allow for flexibility – banks are able to make exceptions on a case-by-case basis. This enables the system to remain responsive to the varied needs of borrowers and their individual circumstances without compromising stability.
Conclusion
APRA remains focused on delivering its primary mandate of ensuring that Australia's financial system continues to be safe and stable. However, we do not pursue a safety-at-all-cost approach. We balance a range of factors in making complex and ongoing judgements about our macroprudential tools. We will also continue to work closely with peer regulators in the Council of Financial Regulators.
Footnote
1Investor lending (3.9 per cent) remains weaker than owner-occupier lending (5.5 per cent).
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, mutuals, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding around $9 trillion in assets for Australian depositors, policyholders and superannuation fund members.