The Australian Prudential Regulation Authority (APRA) has announced long-expected changes to home loan lending rules to cool the property market.
In a letter to lenders on Wednesday, APRA said they expect lenders to increase their serviceability buffer, which banks use to assess a borrowers’ ability to repay the loan, from 2.5 percent to 3 percent.
APRA Chair Wayne Byres said the decision was to ensure the stability of the financial system, where banks lend to people who can afford the level of debt they’re incurring, both at present and into the future.
“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,” Byres said in a statement.
APRA previously found that over one-in-five newly approved loans in the June quarter were more than six times the borrowers’ income causing household debt to increase faster than household income.
“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,” Byres said.
APRA stated that they were not aiming to target property prices, rather, their objective was to ensure borrowers are well-equipped to service their debts under a range of scenarios.
“Across borrower cohorts, the impact of a higher serviceability buffer is likely to be larger for investors than owner-occupiers,” Byres said.
The regulator said they believed the interest rate serviceability buffer was the most appropriate tool to use, as it was relatively easy to implement and does not affect the rates for existing mortgages.
Despite being able to achieve similar effects, lifting the interest rate floor was not used because it would have restricted future owner-occupiers far more than investors.
“On balance, it was considered raising the interest rate buffer was the preferred response on this occasion,” Byres said. “It does not rule out that the other measures might be used in the future.”
APRA’s announcement came after Treasurer Josh Frydenberg signalled for industry regulators to clamp down on high-debt home loans last week.
According to property researcher CoreLogic, Australian houses rose 20.3 percent over the past 12 months, the highest rate since 1989.
Meanwhile, the Reserve Bank of Australia has maintained the cash rate at 0.1 percent for the 11th month in a row, in contrast to the Reserve Bank of New Zealand which has increased its cash rate by 25 basis points to 0.5 percent.