Australia’s banking supervisor tightens mortgage lending requirements

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SYDNEY, Oct. 6 (Reuters) – Australia’s banking regulator on Wednesday tightened restrictions on mortgage lending, saying the rapid growth in lending that has fueled soaring house prices poses a risk to financial stability.

The Australian Prudential Regulation Authority (APRA) estimated that its higher benchmark for assessing the ability of homebuyers to repay loans would reduce a typical borrower’s maximum borrowing capacity by about 5%.

“The increasing share of heavily indebted borrowers and indebtedness in the household sector in general means that medium-term risks to financial stability are mounting,” said APRA President Wayne Byres, in a press release.

With record interest rates and a central bank reluctant to increase the cash rate by 0.1% until 2024, house prices in Australia have risen sharply this year, causing much concern about affordability and debt.

More than a fifth of new loans approved in the June quarter were more than 6 times the borrower’s income, and home loan growth is expected to outpace household income growth, the regulator said.

In a letter to lenders, APRA said they should assess the ability of new borrowers to repay their loans at an interest rate at least 3 percentage points higher than the rate on the loan product, up from 2, 5 percentage points currently.

He also called on banks to review their risk appetite for lending with high debt / income levels, warning that if these lending continued to rise, they would consider further macroprudential intervention.

“Against the backdrop of the current strength in the housing market, this is a modest change,” said David Plank, head of the Australian economy at Australia and New Zealand Banking Group.

“Further macroprudential tightening seems more likely than not,” he added.

Bank stocks were mixed after the announcement, with the Commonwealth Bank of Australia (CBA.AX), the largest lender, losing 2.3%, in a slightly firmer larger market (.AXJO). Shares of National Australia Bank (NAB.AX), the third largest, were the least affected, remaining stable.

APRA said banks that continue to approve loans using the lower 2.5% buffer after October will have their capital requirements increased to reflect higher credit risk.

Reporting by Wayne Cole and Paulina Duran; Editing by David Gregorio and Richard Pullin

Our Standards: Thomson Reuters Trust Principles.

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