The banking regulator has expressed concern over the heavy exposure of Australia’s financial sector to the housing market and warned it may take further steps to ensure lenders do not add to risks with poorly considered new mortgages.
Australian Prudential Regulation Authority chairman Wayne Byres says the nation's banking system has "a notable concentration in housing" by any standard, and needs particular attention to ensure it remains stable.
APRA has already told lenders to limit growth in higher risk interest-only loans to 30 per cent of new mortgages, but could be forced into further action as house prices remain stubbornly high and household debt continues to rise.
"This latest step is a tactical response to current market conditions - we can and will do more (or less) as conditions evolve," he said in a speech on Wednesday.
APRA is assessing the current regulations aimed at ensuring banks hold adequate capital reserves to cover housing-related risks, Mr Byres said.
"If we are going to put an increasing number of eggs into a single basket, we'd better make sure that basket is an unquestionably strong one," he said.
Mr Byres said interest-only loans represented two thirds of lending to investors, so the new limit will hit those borrowers more than owner-occupiers.
APRA has already limited banks to growing their investor lending by 10 per cent a year and Mr Byres said that with recent trends running close to or above that limit, lenders would have to tighten their standards and slow new loans to stay within the rules.
Mr Byres' latest statements follow Reserve Bank of Australia governor Philip Lowe telling an RBA board dinner on Tuesday that the central bank has long been concerned about soaring housing prices pushing up the nation's high household debt to income ratio.
"Too many loans are still made where the borrower has the skinniest of income buffers after interest payments," he said.
"In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong."
Australian Bankers' Association chief executive Anna Bligh on Wednesday said Australia already has one of the strongest and most stable banking systems in the world.
"However, in this new operating environment, it is not enough to have a banking system that is the envy of the world, you also need to enjoy the trust and respect of the broader public," Ms Bligh said.
"Erosion of trust leads to erosion of strength."