Australia’s banking regulator has moved to curb high-risk home lending, raising the minimum interest rate buffer which banks must use when assessing prospective borrower capacity to meet mortgage repayments if interest rates rise.
In its latest move, The Australian Prudential Regulation Authority (APRA) says it will require banks and other financial institutions to assess the ability of prospective new borrowers to meet loan repayments at an interest rate that is 3.0 percent above the rate which is expected to be charged on the loan.
This compares to a 2.5 percent buffer which was previously required.
The decision is expected to reduce the maximum borrowing capacity for typical borrowers by around five percent.
This means borrowers who may have previously been able to borrow $500,000 may now be able to borrow only $475,000.\With some borrowers already being constrained by floor rates used by lenders and many others not borrowing at their maximum capacity, APRA says the overall impact on the aggregate housing market will be modest.
Moreover, it says the effect will be felt more heavily in the investor side of the market as investors generally borrow at higher levels of leverage compared with owner-occupiers.
First-home buyers will be less affected as they are generally more constrained by the size of their deposit and are therefore able to borrow at lower income multiples only, APRA says.
Announcing its decision, APRA said the move comes amid mounting concerns over rising loan values and increasing household debt.
In the June quarter, it says that more than 20 percent of residential lending to new borrowers involved loans which totalled more than six times the relevant borrower’s pre-tax household income.
This, it says, is elevated according to both historic and international standards.
Moreover, it raised concern of potential risks to both the economy and the financial system amid fears that highly indebted households could be vulnerable to future shocks.
It said the action was not aimed at reducing house prices but rather ensuring that lenders is done on a prudent basis and that borrowers are suitably equipped to service their mortgages under a range of potential scenarios.
APRA Chair Wayne Byres said the action was targeted measure which was designed to reinforce the stability of the financial system.
“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” Byres said.
“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building.
“More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income, and at an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead.
“With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted.”
The latest moves come amid growing signs of escalating growth in house prices despite the pandemic.
Over the twelve months to September, data from CoreLogic indicates that average house prices throughout Australia rose by 20.3 percent over the year to September – the fastest pace of growth recorded in more than 30 years since the twelve months to June 1989.
CoreLogic Head of Research Austraila Eliza Owen said evidence of more risky lending had been appearing in recent months.
APRA’s intervention, Owen said, had become a question of ‘when’ rather than ‘if’.
Property Council of Australia Chief Executive Officer Ken Morrison acknowledged the rational for the decision but called for impacts of the current decision to be monitored into the new year before any further restrictions are imposed.
“We understand the prudent rationale for APRA’s decision to adjust these home loan eligibility tests,” Morrison said.
“We note it will be vital for the Government and the regulator to monitor the situation closely into 2022, to ensure their efforts do not sap broader market confidence during our economic recovery.
“Australia’s residential housing market is worth almost $10 trillion and housing represents the bedrock asset of many Australian families. This move comes when fiscal stimulus and the HomeBuilder effect are withdrawing from the economy, the successful transition out of lockdown of our two largest states has yet to occur, and net overseas migration is still negative.
“Strong housing construction has underpinned Australia’s economic resilience through the pandemic and supports more jobs per dollar spent than any other industry and this should never be taken for granted.
“We urge the Government and the regulator to keep a patient focus on the impacts of these changes until the new year and to target their communications accordingly.”