Remember the Doomsters’ “interest-only housing cliff”? It turned out to be a bump
In the constant search for a scary headline promising housing Armageddon, the threat of a calamitous “interest-only cliff” was all the rage earlier this year. It’s turned out to be little more than a bump.
The Doom ’n’ Gloomers seized on the idea that the financial regulator’s crackdown on an unhealthy level of interest-only (IO) loans would cause a crash, as converting from IO to principal-and-interest (P&I) can mean monthly repayments jump by as much as 50 per cent.
The evidence is in that the banks have brought the percentage of IO loans down way under the Australian Prudential Regulation Authority (APRA) speed limit with little effort. They now have plenty of headroom to increase IO loans if they so wish.
Exhibit A for the prosecution against the Chicken Littles is in the ANZ profit figures on Wednesday. Amongst the many numbers, ANZ showed IO loans were down to 22 per cent of their housing portfolio in the latest financial year, from 36 per cent in 2016, before the APRA brought down its stick.
What’s more, the flow of IO loans in the latest six months was running at only 13 per cent of new housing loans. That is less than half the 30 per cent IO speed limit for new loans imposed by APRA in March last year.
Not everyone seems to have received the memo that the cliff is being managed. The Australian Financial Review is reporting “ANZ faces blitz of interest-only loan expiry over next two years”.
Well, yes, the term of existing IO loans will run out, at which stage they need to be converted into P&I – or renewed as IO, an option that seems to go undiscovered.
The catch is that would-be IO borrowers and refinancers now have to undergo full income verification.
Those who have had a change of circumstances for the worse, or were fibbing in the first place, might find themselves in a spot of bother. But the banks’ experience is that the “cliff” is but a bump in the general scheme of things. Provision for bad debts actually fell while the IO book has been reduced.
It’s also worth remembering that APRA has lifted its foot off the brake on investor lending – banks just have to find investors both wanting to borrow in the present market and able to service the loan.
The obvious headline for the ANZ results was that profit dipped 5 per cent to “only” $6.5 billion, as royal commission-related costs bit. But as usual, with big corporate results, there are other stories within the figures. The IO insight was just one of them.
Another is confirmation that banks are indeed competing for owner-occupiers’ business. ANZ’s CEO said as much, and again the proof was in the numbers: ANZ’s net interest margin tightened from 1.99 per cent down to 1.87 per cent.
Despite that, and the cost of making up for past failures reducing the bottom line profit, ANZ was able to maintain its final dividend at 80 cents a share. That meant on its closing share price, ANZ was offering a annual dividend yield of 6.24 per cent. Add in the franking credits and that’s the pre-tax equivalent of about 8.8 per cent.
Yes, credit growth has slowed and there will be further costs coming out of the royal commission, but as reported yesterday, our big banks have demonstrated the ability to find many billions of dollars without too much pain when they need to.
For superannuants focussing on income with a fat 8.8 per cent or so on offer, the question about bank stocks is primarily whether current dividends are sustainable, not what growth is in the offing.
It looks like the IO cliff threat is turning out not to be a threat, but there will always be others turning up in headlines.
For example, The Australian newspaper on Monday carried a column claiming that we’re undergoing “a credit squeeze without any Australian precedent”.
My old colleague Glenn Dyer comprehensively skewered that idea in Crikey. But scary headlines will always sell newspapers.