Banking regulator moves to slow the flow of housing finance

Australia’s banking watchdog has moved to restrict the flow of finance into the property sector, telling banks to increase the minimum interest rate buffer used to assess the serviceability of home loan applications.

The Australian Prudential Regulation Authority wrote to all authorised lenders this week telling them to assess new borrowers' ability to meet loan repayments at an interest rate of at least 3 per cent above the rate offered.

Banks were previously using a buffer of 2.5 percentage points.

APRA chair Wayne Byres said the move was a “targeted and judicious action” that would reinforce the stability of Australia’s 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,” Mr Byres 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.”

APRA estimates that household borrowing capacity will drop by 5 per cent, with a household under the old rules able to borrow a maximum of $500,000 to have a reduced borrowing capacity of $475,000.

RateCity.com.au research director Sally Tindall said the changes would “clip the wings” of people borrowing at the top of their budget.

“Many Australians looking to buy will be scrambling to find out how much their bank will now lend them and whether they can still afford to buy the property they want,” Ms Tindall said.

“The changes are designed to protect people from taking on risky levels of debt, however, it will hurt first homebuyers who typically have smaller incomes and deposits.”

Ms Tindall said while property prices were affected by a range of factors, how much people can borrow was one of the most influential.

“In July 2019 when APRA scrapped the minimum floor rate alongside a series of cash rate cuts, many Australians saw their borrowing capacity rise overnight and the property market followed.

“Today’s hike to the serviceability buffer is also likely to have an impact on the property market.

“Many households don’t borrow at capacity, but anyone who was planning to will have to reassess their budget and potentially their home buying plans.

“This change will be a hard pill for some borrowers to swallow, however, it will ultimately protect them from overstretching themselves and that’s a good thing.”

Housing Industry Association chief economist Tim Reardon said today’s announcement by APRA would dent the homeownership aspirations of many renters.

Mr Reardon said the financial sector in Australia was unquestionably strong,  with the share of loans that are impaired exceptionally low at around 0.4 per cent of all loans issued.

“The very low levels of mortgage delinquency in Australia reflect the restrictive lending regulations imposed by financial regulators in Australia,” Mr Reardon said.

“Since 2020, financial regulations have made it progressively more difficult for first homebuyers to enter the market.

“First homebuyers accounted for 35 per cent of owner-occupier loans in August 2021 and these measures will make it harder to access a loan.”

Mr Reardon said first homebuyers would be disproportionately affected by the change.

“Restricting access to credit for new households seeking to enter the housing market will put further downward pressure on the rate of home ownership in Australia,” he said.