SYDNEY, (Reuters) – Australia’s banking regulator on Wednesday tightened restrictions on home lending, saying rapid loan growth that has fed a surge in housing prices poses a risk to financial stability.
The Australian Prudential Regulation Authority (APRA) estimated its higher benchmark for assessing home buyers’ ability to repay loans would reduce a typical borrower’s maximum borrowing capacity by about 5%.
“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,” APRA Chair Wayne Byres said in a statement.
With record low interest rates and a central bank reluctant to raise the cash rate from 0.1% until 2024, Australia’s house prices have risen sharply this year, leading to much angst about affordability and debt.
Over a fifth of new loans approved in the June quarter were for more than 6 times the borrower’s income, and housing credit growth is expected to outpace household income growth, the regulator said.
In a letter to lenders, APRA said they should assess the ability of new borrowers to meet their loan repayments at an interest rate that is at least 3 percentage points above the loan product rate, up from 2.5 percentage points at present.
It also asked banks to review their risk appetite for lending at high debt-to-income levels, warning that if such lending continued to grow, it would consider further macroprudential intervention.
“In the context of the current strength of the housing market this is a modest change,” said David Plank, head of Australian Economics at Australia and New Zealand Banking Group.
“Further macroprudential tightening seems more likely than not,” he added.
Bank shares were mixed following the announcement, with Commonwealth Bank of Australia (CBA.AX), the largest lender losing 2.3%, in a slightly firmer broader market (.AXJO). Shares in National Australia Bank (NAB.AX), the third-largest, were the least affected, holding steady.
APRA said banks that continue to approve loans using the lower 2.5% buffer after October will have their capital requirements increased to reflect a higher credit risk.