Banks face new lending limits as APRA moves to cool housing market

Australia's banking regulator will impose lending limits to halt the build-up of riskier lending in a first-of-its-kind move designed to cool the housing market.

The banking regulator is seeking to cool Australia’s rapidly heating housing market by imposing debt-to-income lending limits on mortgages.

In a first-of-its-kind intervention, the Australian Prudential Regulation Authority announced on Thursday it will limit high debt-to-income home lending to proactively contain a build-up of risky residential mortgage loans that, if left unchecked, could threaten the financial system.

From February 1, the limit will prevent banks from lending more than 20 per cent of new mortgages to borrowers with a debt of six times their annual income or more. The limit will apply separately to owner-occupier and investor lending.

While the move will likely have an impact on Labor signature housing policy, the 5 per cent deposit scheme, at the margins, it is clear APRA is more concerned about risky investor loans.

APRA chair John Lonsdale said that the aggregate level across all banks of lending which sat above six times debt-to-income for owner-occupiers, which the scheme falls under, was sitting at around 4 per cent, while the same figure for investors was as high as 10 per cent.

Investor loans account for almost 40 per cent of all mortgages, according to the latest Australian Bureau of Statistics figures.

“That means that in the near term, these new limits won’t be binding on most banks, so will have little impact on the aggregate flow of credit to either owner occupiers or investors. But we have seen in the past that risks can build quickly,” he said.

While Mr Lonsdale said that the aggregate levels were currently far below the 20 per cent cap, he revealed that some institutions were nearing the limit. However, he refused to name which banks had been making risky loans.

“There are some entities that are reasonably close to that limit that we’re putting in, and you would expect it in the not too distant future to have a binding effect on those,” Mr Lonsdale said.

The 20 per cent limit would act as a “guardrail” for those banks before it comes into effect in February, Mr Lonsdale said.

Bridging loans for owner-occupiers and mortgages for the purchase or construction of new dwellings are exempt from the new limit.

APRA said that while overall borrowing remained sound, it had observed a pick-up in some riskier forms of lending in the housing market over recent months.

This was partly driven by lower interest rates supercharging borrowing rates, with increasing numbers of customers tapping banks for larger loans.

Housing credit growth has also picked up to above its longer-term average, while housing prices have risen further.

Mr Lonsdale said that in the past risks in the home lending market can “build rapidly when interest rates are low or declining, borrowers extend themselves and competition among banks for new mortgage lending intensifies, which can lead to easing lending standards”.

APRA chair John Lonsdale said the regulator wasn’t prepared to wait for the problem to get bigger. Picture: John Feder/The Australian

APRA, which oversees the banking, superannuation, and insurance sectors, said that the riskier home loans could threaten the financial resilience of banks in the event of an economic recession. Mr Lonsdale said he was not prepared to wait for the problem to get bigger.

“We are going early, but we believe introducing (debt-to-income) limits or guardrails now will help mitigate risks stemming from high risk lending and be less disruptive than waiting. Housing debt is a key vulnerability for the Australian financial system,” he said.

Mr Lonsdale said that “Australia’s banking sector having more exposure to residential mortgages than any other comparable economy”.

“We also have very high levels of household debt, in part due to the high cost of housing,” he said.

Mr Lonsdale would not comment directly on the Albanese government’s controversial 5 per cent deposit scheme.

“There is quite a lot of headroom … between where owner occupiers are at the moment, which is around the 4 per cent mark and the limits that we are imposing, which is at the 20 per cent mark,” he said.

“At the moment, they will be non-binding in aggregate. But as I mentioned, we will be watching very closely.”

Most borrowers under the scheme are unlikely to be impacted as first home buyers tend not to borrow at high debt to income ratios, compared to investors who have existing assets to borrow against.

Mr Lonsdale said that APRA would consider further risks if it observed a “deterioration in lending standards”.

However, Barrenjoey banking analyst Jon Mott said that Wednesday's inflation blowout would likely trigger two rate rises next year, which would take the heat out of the market by reducing borrowing capacity for both owner-occupiers and investors.

“Therefore, we believe it is prudent for APRA to proactively look to manage the build-up of risk in the Australian housing market, especially as Australian households are near the most over-leveraged in the world,” he said.

“However, these policies are unlikely to be a binding constraint for any large (bank) any time soon.”

APRA’s decision to carve out bridging loans for owner-occupiers and loans for the purchase or construction of new dwellings from its debt-to-income limit was welcomed by Australian Banks Association chief executive Simon Birmingham.

“Whilst macroprudential policy settings are important for financial stability, the best way to address housing affordability is to boost supply, and we therefore welcome APRA’s exemption of loans for new dwellings,” Mr Birmingham said.

But the former minister for finance cautioned against any limits to loans, pushing borrowers to riskier non-bank lenders.

“It is important that settings maintain access to safe financing through banks and not create any barriers that could unduly push borrowers into higher-risk non-bank lenders,” Mr Birmingham added.

Jim Chalmers said APRA’s intervention in the housing market “will help with financial resilience and housing affordability”.

“It’s about managing emerging risks in our financial system and will help people into the market,” he said.

“These rule changes are an important way for the regulator to reduce risk in our economy, but these efforts will also help when it comes to getting people into homes.”

Liberal Senator Andrew Bragg previously told The Australian that the government’s 5 per cent deposit scheme had been a “reckless” intervention in the housing market, done without appropriate modelling of its impacts.

“Of course, this unmeans-tested free-for-all was going to drive up prices and increase risk in the system. I don’t think anyone is surprised,” he said.

Domain’s chief of research and economics, Dr Nicola Powell said the 20 per cent limit should be seen as more of a guardrail, rather than a “handbrake”.

“While the limit could start to influence investor behaviour down the track if high-DTI volumes surge, for now, it’s a policy that strengthens the system’s resilience without punishing households or dampening the essential need for new supply,” Dr Powell said. 

Originally published as Banks face new lending limits as APRA moves to cool housing market