The Australian Prudential Regulatory Authority (APRA) speaks up about the concerns regarding the growth in commercial property loans, which may be the trigger for a new banking crisis. This reputed financial regulator has focused its entire attention this sector because this is one of the greatest risks for the banks.

According to Charles Littrell, an APRA official, the aspect of commercial property loans was one of the key points for the above institution, as a result of the latest concerns in this area.

A threat bigger than mortgage lending

Luci Ellis, the chief of financial stability of the Reserve Bank, mentioned once again that mortgages are not a serious cause of concern for banks. Instead, commercial property loans come with a wide array of risks for the financial institutions.

Dr. Ellis said now that mortgages don’t represent the main problem that affects the banks. In September last year, he had mentioned this too, in another speech. At that moment, he said that banks suffer plenty of losses because of commercial property.

This time, his speech was a comment on the fact that RBA showed itself worried and cautious about the risks of banks triggered by the developments of commercial property. In fact, the latest Financial Stability Review warned about the danger of “large losses” of banks due to commercial property loans.

The same review, which was released in April 2016, revealed the fact that the sustainability of yields in this field is questionable, especially when the interest rates all over the world rose significantly, right after a rapid growth in prices.

At the moment, ANZ, NAB, Westpac and Commonwealth Bank have about 60% of their loans in residential housing, which is a primary source of risk for them.

The report published by APRA showed that in March this year, Australian financial institutions had commercial property loans worth more than $250 billion, which is 7.4% higher than it was in March 2015.

Healthy lending is the key

Mr. Littrell said that, at the moment, APRA is focusing on healthy lending. So, they have started to put a lot of effort in this area. Another important aspect is that they are now using some sort of systemic supervisory. He also revealed that financial regulators are highly cautious regarding the development of commercial property. Moreover, the increasing leverage and valuations, as well as the low-interest rates, are making them think in a more conservative way.