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Time to tighten up - watchdog warns banks to increase loan buffers

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Banks will be forced to rein in their lending for home loans and cool the booming property market after the industry regulator increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.

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What this means is that the Australian Prudential regulation Authority now expects banks will assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3 percentage points above the loan product rate.

The current buffer is 2.5 per cent so the increase is expected to reduce borrowing capacity by only 5 per cent, but ANZ said this was likely to be the first step. 

“In the context of the current strength of the housing market this is a modest change. Indeed, APRA itself said the overall impact on aggregate housing credit growth flowing from this is expected to be fairly modest,” ANZ said in a report this morning.

“As such, further macroprudential tightening seems more likely than not.”

Although the move is modest, sentiment is the key in real estate. In making the decision APRA was clearly concerned that the market was heading towards trouble.

APRA said its decision reflected growing financial stability risks in residential mortgage lending which it highlighted with the fact that more than 20 per cent of new loans approved in the June quarter were at more than six times the borrowers’ income.

APRA Chair Wayne Byres said it was “a targeted and judicious action designed to reinforce the stability of the 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,” 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.

“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 said it was not targeting house prices which are escalating at about 20 per cent.

“APRA’s objective is to ensure that mortgage lending is conducted on a prudent basis, and that borrowers are well-equipped to service their debts under a range of scenarios,” it said.

APRA said very low interest rates and rapidly rising house prices meant that pressures on household indebtedness were likely to remain heightened and the growth in household debt was expected to exceed income growth in the period ahead, further adding to concerns around overall household indebtedness.  

It said highly indebted borrowers were likely to be less resilient to future shocks, such as from rising interest rates or a reduction in income.

The Property Council chief executive Ken Morrison said APRA may have acted too quickly.

“The prudential regulator needs to bear in mind that both general fiscal support and the HomeBuilder effect are receding from the economy, while the big economic engine of population growth is yet to begin to restart,” Morrison said.

When it comes to housing affordability, regulators have neither a crystal ball nor a silver bullet. Industry will continue to encourage a cautious and sensible approach that won’t risk our recovery from the pandemic.”

 

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