The banking regulator warned the incoming Albanese government that it would face "heightened" risks in the housing market as interest rates rise.
The warning came in the incoming-government brief prepared for the new Labor government when it took office in May, and was made public as the result of a freedom of information request by the Australian Financial Review.
The 48-page document laid out a range of issues APRA was looking at across the banking, insurance and superannuation industries it regulates, but housing was front and centre.
"Risks in housing markets are heightened," the report warned.
"A sustained period of record low interest rates has seen strong growth in housing prices in recent years and this has been high relative to advanced economies globally. Households' debt levels relative to income are also elevated, both historically and internationally."
Even though interest rates had only just started rising in May, when the report was written, APRA cautioned that more expensive mortgages would put some borrowers in financial trouble.
"The faster-than-expected emergence of inflationary pressures and a rising interest rate environment is likely to place some strain on household balance sheets and place a number of households in financial distress," it noted.
"Low interest rates have, in aggregate, assisted borrowers in building substantial mortgage repayment buffers. Nevertheless, a number will experience loan repayment shocks [particularly those on very low fixed rates] as interest rates increase.
"More generally, high interest rates will reduce borrowing capacity, increasing the likelihood of a decline in Australian housing prices."
The sentence after this was redacted from the FOI because it was either an opinion, recommendation or advice, or because it was part of a deliberative process.
Surging interest rates 'risk crashing the property market'
Recent CoreLogic figures show Sydney house prices falling close to 2 per cent over the past month, with prices in Melbourne also declining sharply and slowdowns emerging across the other major cities.
Many economists, including those at the major banks, are now forecasting peak-to-trough falls of more than 15 per cent for home prices nationally, with some warning of the risk of much bigger declines.
AMP chief economist Shane Oliver said Sydney home prices are now falling at their fastest monthly pace since the mid-1980s after 1.25 percentage points of Reserve Bank interest rates rises since the start of May.
"This along with falling real incomes will act as a drag on consumer spending ahead," he recently warned.
"Hiking the cash rate to the 3.5 per cent or so level expected by the money market risks crashing the property market and hence the economy.
"So, we remain of the view that rates won't get that high."
Aside from the impact on house prices and households with home loans, APRA cautioned that commercial property values and loans were likely to deteriorate under rising rates.
"Commercial property lending may also be an emerging area of concern for ADls, with higher interest rates, supply chain difficulties and post-pandemic changes to ways of working and consumer behaviour potentially having a negative impact on values for office and retail sector assets," it observed.
"These drivers may play out in increasing levels of non-performing loans in business lending, including construction."
Banks should be fine even if property, economy tanks
APRA's responsibility is to safeguard financial institutions and their customers from the risk of those banks, insurers or superannuation funds collapsing.
It has no explicit responsibility for protecting consumers or safeguarding the economy from risks generated by the banking sector, tasks that primarily fall to ASIC and the Reserve Bank respectively.
With that in mind, APRA assured the Albanese government that it was confident Australia's banks could survive a property downturn and economic slowdown.
"The banking industry is strong and well placed to absorb a deterioration in asset quality [from housing portfolios, or other sources]," it argued.
"While arrears rates are likely to increase as interest rates rise, non-performing loans are currently low and are expected to remain moderate even under a period of stress.
"APRA will continue to actively monitor lending standards and evolving risks in housing markets and review its macro-prudential response in consultation with CFR [Council of Financial Regulators] agencies."
Perhaps this strength in the banking sector is what outgoing APRA chair Wayne Byres was referring to earlier this week when announcing his early retirement from the role.
"There is always more to do, but the financial system is stable, APRA's leadership team is strong, and the organisation and its people are well placed to continue to manage future challenges," he said in a statement.
"Against that backdrop, I feel that now is a good time to hand over the chair's role to someone new, who will lead the organisation on the next stage of its journey."
Mr Byres was due to finish his current five-year term at the end of June 2024, but will instead step down at the end of October this year.
