The banking watchdog is cracking down on risky mortgage lending as the property market heats up.
All banks and lenders will be visited by the Australian Prudential Regulation Authority (APRA) in the first three months of 2015, and if risky practices are identified, they face increased scrutiny.
That could mean further action, including an increase in the level of capital a bank or lender must hold as a financial buffer, although those measures are not being introduced as yet, APRA chairman Wayne Byres said.
“This is a measured and targeted response to emerging pressures in the housing market,” he said.
“These steps represent a dialling up in the intensity of APRA’s supervision, proportionate to the current level of risk and targeted at specific higher risk lending practices in individual authorised deposit-taking institutions.
“There are other steps open to APRA, should risks intensify or lending standards weaken and … we will continue to keep these under active review.”
Risk is increasing in the housing market due to a combination of record low interest rates, high household debt and strong competition among lenders for new loans, APRA said.
The regulator’s increased monitoring will include a specific focus on higher risk mortgages, any strong growth in lending to property investors, and loan affordability for new borrowers.
APRA said new borrowers should be able to afford a two per cent interest rate rise, and good practice would be to maintain a buffer comfortably above that level.
A strong rise in the proportion of property investors in the housing market – they made up more than half of all new mortgages approved in September – has fuelled talk of regulatory changes in the market.
The Reserve Bank of Australia has been talking to APRA about the potential use of “macroprudential” policy tools to prevent over-exuberant investors from inflating housing prices.