APRA Growing

APRA Growing Increasingly Concerned About Bad Loans

11 July 2020,

The big four banks acted almost immediately to allow the deferral of mortgage repayments for 6 months once they had details of the lockdowns about to be implemented by the state and territory governments. Smaller lenders had little choice but to follow suit.

By allowing deferrals of mortgage repayments for eligible borrowers the banks prevented a sudden increase in mortgage defaults and made more money from the customers that took them up on their offer to defer repayments.

As the end of the initial 6 month deferral period approaches APRA has announced that the period will be extended by up to 4 months, a total of 10 months from the date the repayment deferral started, or 31 March 2020, whichever comes first.

APRA said banks can continue to show the mortgages of approximately A$236 billion as performing loans for capital and reporting purposes. Therefore banks do not need to hold more capital for regulatory reporting and capital adequacy requirements as any period of arrears is being disregarded by the regulator until as late as 31 March 2021.

The extension will not be applied automatically according to the Australian Banking Association and will only be available to borrowers that can demonstrate ongoing hardship.

It appears as though APRA and lenders were concerned that there would be too many defaults if the deferral period wasn’t extended.

APRA allowing the banks to carry loans that range from likely to default to certain to default as loans that are being repaid is questionable.

The RBA has made it clear that they will not be increasing the interest rate until Australia is approaching full employment. With mortgages around 2%, May saw more owner occupiers refinance with a new lender than any previous month on record according to the ABS.

The market value of certain property types including pubs, gyms, restaurants, cafes, retail and office will be more adversely impacted by Covid-19 and the lockdown/s than residential and industrial markets in Metropolitan Sydney.

Despite all of the factors putting downward pressure on property prices some residential and industrial markets in Metropolitan Sydney are highly unlikely to see significant price falls. There is still a shortfall in supply in some markets and interest rates are unusually low.

Suburbs around the fringe of Metropolitan Sydney that saw rapid price growth over the past few years are at highest risk of significant falls in residential property value.

Michael Wright

(c) Aspect Valuation Services

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