Housing hurdles as rules tighten
WOULD-BE first-time homebuyers are set to face tougher hurdles to enter the market after a decision by the banking regulator to tighten lending standards.
In a letter to the banks, the Australian Prudential Regulation Authority increased the minimum interest rate buffer on home loan applications from 2.5 to 3 percentage points.
From the end of October, the banks will have to test whether new borrowers can still afford their mortgage repayments if home loan interest rates rise 3 percentage points above their current rate.
APRA chair Wayne Byres said the changes were targeted and 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,” he 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 regulator said the changes would only apply to new borrowers.
Residential property prices in Australia have soared by 16.8 per cent over the past 12 months as low interest rates drive demand from first-home buyers and investors.
In a statement on Tuesday night, RBA governor Philip Lowe also dialled up his warning on the importance of home lending standards.
“The Council of Financial Regulators has been discussing the medium-term risks to macroeconomic stability of rapid credit growth at a time of historically low interest rates. In this environment, it is important that lending standards are maintained and that loan serviceability buffers are appropriate,” Mr Lowe said.
The tightened regulations come just two weeks after Commonwealth Bank chief executive Matt Comyn warned action must be taken to avoid a New Zealand-style government intervention.
“We think it would be important to take some modest steps sooner rather than later to take some of the heat out of the housing market,” Mr Comyn told a parliamentary inquiry.
“I think it would be prudent to act sooner rather than later.”