The regulator of Australia’s banks has responded to a call from the Australian Government to help unlock the construction of more housing units by clarifying its position on lending to residential property developers.
The Australian Prudential Regulation Authority (APRA) has written to authorised deposit-taking institutions (ADIs) saying a letter it sent them in March 2017 did not represent a minimum requirement or expectation.
In the letter APRA noted that some ADIs had tightened underwriting criteria for residential development lending and were “generally requiring qualifying presales equivalent to at least 100 per cent of committed debt”.
“Consistent with APRA’s supervisory engagement in recent years, APRA clarifies that the reference to presales coverage in its March 2017 letter does not represent a minimum requirement or expectation of APRA," APRA Board Member Therese McCarthy Hockey said in a media release.
"It was a reflection of industry practice observed at the time through the thematic review."
Hockey said APRA’s requirements and guidance for ADIs, which include banks, building societies and credit unions, were that they maintain prudent policies and sound credit assessment and approval criteria.
She said although presales played an important role in a sound credit risk management approach, APRA had not set minimum requirements or expectations for presales in these standards and guidance.
APRA was responding to call on Wednesday from Treasurer Jim Chalmers for the regulator to update and clarify its regulatory guidance to help unlock the construction of more units.
Chalmers said some lenders had interpreted advice from APRA to mean that finance for construction of new unit blocks should depend on all properties being pre‑sold which, lenders had indicated, was a barrier to financing.
“The interpretation of this guidance as “100% pre‑sales” by some lenders has limited housing supply, as smaller developers often don’t have the capital to finance the start of construction without support from the banks,” Chalmers said in a media release.
“APRA has confirmed it will communicate to banks that while it expects banks to consider the extent of presales as part of prudent credit risk management, APRA does not expect 100% pre‑sales.”
One property developer said banks had been requiring 100% pre-sales for at least 20 years.
“To us it was always the banks’ policy, not APRA’s,” he told Azzet.