Regulator calls time on housing market party, tightens standards

Prospective home buyers will have tens of thousands of dollars cut off the amount they can borrow after the banking regulator stepped in to tighten lending standards in the face of soaring house prices and growing concern about the stability of the financial system.

As record low interest rates put a rocket under the property market, the banking regulator on Wednesday took its first step to put the brakes on higher-risk mortgage lending and growing household indebtedness.

Treasurer Josh Frydenberg said APRA’s measure were “targeted and prudent.”Credit: Alex Ellinghausen

Under the changes announced by the Australian Prudential Regulation Authority (APRA), banks will be forced to use more cautious interest rate assumptions when assessing new customers. The change is expected to reduce new customers’ borrowing capacity by about 5 per cent.

Economists and banks said the changes would take some heat out of the property boom - which has seen Sydney house prices jump more than 20 per cent in the last year - but they were unlikely to cause prices to fall.

Commonwealth Bank chief executive Matt Comyn said APRA’s move was a sensible step for borrowers and banks, and he flagged the possibility that more tightening could be needed.

“We will implement the changes this month and expect that it may be necessary to consider additional steps as lockdowns end and consumer confidence increases,” Mr Comyn said.

Treasurer Josh Frydenberg said that while the economy was well positioned to strongly recover as lockdown restrictions eased, it was important to assess the appropriateness of macroprudential settings. “We must be mindful of the balance between credit and income growth to prevent the build up of future risks in the financial system,” he told The Sydney Morning Herald and The Age.

“The measures announced today by APRA and supported by the Council of Financial Regulators represent a targeted and prudent step to address these risks.”

Shadow treasurer Jim Chalmers backed the move, saying it should make credit for housing more sustainable and appropriate. “Labor knows that housing affordability is a major issue for Australians,” he said.

“For eight long years things have only been getting worse under the Liberals and Nationals, who’ve pretended that it’s not their problem.”

Under the change, banks must test whether new customers could manage their repayments at an interest rate 3 percentage points higher than the actual rate on the loan. Until now, banks have added 2.5 percentage points – known as a “serviceability buffer” – onto the rate of the loan when assessing a customer.

Analysis from comparison website Canstar shows a customer with an income of just over $90,000 would have their borrowing capacity cut by $30,000 as a result of the change. Someone earning almost $60,000 would have their borrowing capacity reduced by $17,000.

Since the Reserve Bank started cutting interest rates in mid-2019, average mortgages to buy an established house have swelled. Across NSW, the average mortgage has jumped by 36 per cent to $755,000 while in Victoria it has increased by third to $634,000.

APRA said increasing the “serviceability buffer” by 0.5 percentage points would cut a typical customer’s borrowing capacity by about 5 per cent. That would mean a customer’s borrowing capacity that was previously $500,000 would fall to $475,000.Credit: Rob Homer

APRA said the “modest” tightening in lending rules was likely to have the biggest impact on property investors, and it would keep a close eye on risks in the property market, with the option to impose further home loan curbs if needed.

APRA chairman Wayne Byres said the move was a response to housing debt growing faster than household income, and an increasing number of customers borrowing more than six times their income.

“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,” Mr Byres said.

There has been speculation APRA would introduce home loan curbs for months, but regulators have also been keen to avoid making it even harder for first home buyers to enter the property market.

APRA said first home buyers were generally less likely to borrow a high multiple of their income because their borrowing capacity was more constrained by the size of their deposit.

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