Property investors targeted by new limits aimed at stopping risky lending

Riskier lending as property prices rise and FOMO grips the market has prompted the banking regulator to crack down on lending practices, with property investors in its crosshairs.

The Australian Prudential Regulation Authority (APRA) announced on Thursday (27 November) that it will limit high debt-to-income (DTI) home lending to pre-emptively contain a build-up of housing-related vulnerabilities in the financial system.

APRA Chair John Lonsdale said the regulator was acting now to head off risks generated by a booming housing market.

A statement from the authority said that although bank lending standards overall were sound, it had observed a pick-up in some riskier forms of lending over recent months as interest rates have fallen.

“Housing credit growth has picked up to above its longer-term average and housing prices have risen further.

“Combined with a resilient labour market, these trends suggest a shift in the financial risk cycle and a potential build-up of vulnerabilities that could undermine banking sector and household financial resilience if left unchecked.

It singled out high DTI lending as starting to pick up, albeit from a low base, driven by high DTI loans to investors.

Property investors account for two in five new loans, and the value of investor lending surged by 18 per cent in the September quarter alone.

“This is expected to increase further in this part of the cycle, and already high household indebtedness could increase further.”

From 1 February next year, the limit on home loans will allow authorised deposit-taking institutions (ADIs) to lend up to 20 per cent of their new mortgage lending at a debt-to-income ratio above six – a mortgage worth more than six times the borrower’s income.

The limit will apply separately to ADIs’ owner-occupier and investor lending so as to avoid the risk of investors forcing out owner-occupier buyers.

Before this change, APRA did not have a binding DTI cap in place. Their previous macroprudential tools focused on other risk metrics: for example, high loan-to-valuation ratio (LVR) lending and the concentration of interest-only lending, especially in investor loans.

Whether the new limit has any significant impact on the booming property market is yet to be seen.

According to APRA, only 1 per cent of new loans to investors are made at debt-to-income ratios of six or more, and one in 25 owner-occupier loans.

Helen Avis, Director of Finance, Specialist Mortgage, was sceptical.

“I doubt these changes will have any meaningful impact,” she said.

“In practice, very few borrowers are getting anywhere near a DTI above 6 — we simply haven’t seen servicing assessments come close in recent months. With banks already applying stricter HEM (Household Expenditure Measure) benchmarks and tighter buffers, most applicants are constrained well before hitting APRA’s new threshold.”

The move was praised by the Treasurer Jim Chalmers but was criticised by The Greens for not going far enough.

“These are important changes that will help with financial resilience and housing affordability,” Mr Chalmers said in a statement released Thursday.

“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.”

Greens Senator Barbara Pocock said it was a good start in attempting to quell the massive spike in investor lending but did not go far enough.

“This is an important first step in limiting runaway investor lending that outcompetes first home buyers but it’s not enough.

“$40 billion has gone to investors in the last three months and APRA and Mr Chalmers need to stop the tens of billions flowing to investors.

“APRA must use all the tools in their toolbox to rein in investor lending that is exacerbating the housing affordability crisis.

“Investor lending is growing at an unsustainable pace, outstripping loans to owner-occupiers; first-home buyers are being priced out by investors at weekend auctions, house prices are surging, and the banks are profiting handsomely.

“This housing crisis is heading toward a point where it may be impossible to reverse without immediate, decisive action.

“The Treasurer has the authority to issue directions to APRA and he should do so immediately,” Senator Pocock said.

APRA’s DTI limit excludes bridging loans for owner-occupiers and loans for the purchase or construction of new dwellings.

APRA limits are new tool in their armoury

While APRA’s new 20 per cent cap on high DTI lending marks the first time the regulator has imposed a formal DTI limit, it is not the first instance of macroprudential intervention in the mortgage market.

During the 2014–2018 period, APRA targeted what it viewed as emerging structural risks: high LVR lending and the rapid growth of interest-only and investor mortgages.

In late 2014, APRA instructed banks to keep investor lending growth below 10 per cent annually. Two years later, it tightened serviceability benchmarks and, in 2017, introduced a temporary cap limiting interest-only loans to 30 per cent of new mortgage lending.

These measures sharply curtailed riskier borrowing and were wound back once lending standards strengthened.

None of these earlier interventions, however, involved binding limits on high-DTI loans.

APRA monitored the metric and regularly published data on lenders’ exposure but stopped short of imposing a hard threshold.

The new 20 per cent cap applying from early next year represents a shift towards more explicit controls on the riskiest segment of new mortgages, reflecting heightened concerns about household leverage and the concentration of debt among marginal borrowers.

In late July, APRA kept the current 3 per cent mortgage serviceability buffer, concluding that this level of borrower protection has not been restrictive on new credit to the household sector.