There is set to be significant turbulence in Australia, with homebuyers and banks facing huge risks as interest rates and inflation spike. The warning comes from the industry regulator, with Wayne Byres from the Australian Prudential Regulation Authority (APRA) recently stating that the next few years could be difficult.
Byres was speaking at a conference earlier this week, and his comments came as inflation and interest rates continue to rise far more quickly than expected. This has highlighted the risk to borrowers in the housing market who have a lot of debt.
During the conference, he stated, “The next few years will be far from plain sailing.” He added, “Housing loans have been, as they say, as safe as houses. That may not be the pattern in the future.”
Borrowers could face huge issues
As a result of the economic climate, borrowers could find themselves facing significant issues in the near future. Moreover, if house prices fall, as many industry officials expect them to, the situation could become even more difficult.
The combination of higher inflation, more expensive mortgages, and falling property prices could leave homeowners dealing with what Byres described as “repayment shock, possibly compounded by negative equity”. This could cause huge issues if and when borrowers try to refinance over the coming few years. He also said that the situation could lead to ‘pockets of stress’ emerging.
According to reports, APRA will be avoiding blanket rules across the market in order to tackle sector concerns. Instead, the regulator will tackle these on a bank-by-bank basis. Byres said that this could lead to changes to lending policies, which, combined with interest rate increases, could lead to higher risk borrowing moderating over time.
The regulator also revealed that Australia was likely to benefit from $3.5 trillion in superannuation savings that will need to be invested.
Concerns over the banking sector’s response to climate change risk
APRA also raised concerns over the banking sector’s response to climate change risk. Out of all banks that the industry regulator surveyed, only around 50% were doing assessments of emissions tied to their lending exposures.
Byres said that the banking sector would need to play a vital role in financing the nation’s investment and transition to a low-carbon economy. He said that this was vital to meet the 2050 zero emissions target that has been set. However, he added that the banking industry needed to properly understand how this would impact borrowers.