Australia's banking regulator raised the minimum interest-rate buffer that lenders need to account for when assessing home-loan applications, citing growing risks to financial stability from a booming housing market.
The Australian Prudential Regulation Authority told lenders it expects them to assess new borrowers' ability to meet loan repayments at an interest rate that is at least 3 percentage points above the loan product rate, according to a statement Wednesday. That's up from the 2.5 percentage points commonly used by banks at present.
Property prices Down Under are soaring in response to ultra-low interest rates, a phenomenon seen across the developed world as central banks eased policy to support economies during the pandemic. The International Monetary Fund has urged Australia to introduce lending curbs, warning surging house prices raised issues about affordability and financial stability.
"This is in line with what we were expecting, albeit a bit sooner, and will help temper credit growth, especially to those that are more indebted and for investors as well," said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. "We would expect further macro pru measures if this fails to slow credit growth."
Momentum for lending curbs has been building, with the central bank official tasked with overseeing financial stability setting out options in a speech last month, and the latest Council of Financial Regulators statement saying APRA plans to publish a paper on its framework for implementing macroprudential policy in the next couple of months. Treasurer Josh Frydenberg has also spoken out on the issue.
"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," according to the statement.
Financial regulators are grappling with how to contain surging credit and a red-hot property market without choking off the economy's recovery. The Reserve Bank of Australia has said consistently it doesn't expect to raise rates until 2024 at the earliest -- leaving tighter lending rules as the only way to rein in the property market.
Matt Comyn, chief executive officer of Commonwealth Bank of Australia, said the move would help take some heat out of the housing market. Shares of CBA, the country's largest mortgage lender, slipped 2.3 per cent as of 11:05 a.m. in Sydney, with rival lenders showing more muted moves.
"We think this further step will provide additional comfort for borrowers and is a prudent measure for lenders," he said in an e-mailed statement Wednesday. "We will implement the changes this month and expect that it may be necessary to consider additional steps as lockdowns end and consumer confidence increases."
The rapid house-price gains in Sydney and Melbourne have come despite protracted lockdowns, and as growing household debt raises financial stability issues. The RBA has ruled out tightening policy to cool asset prices -- unlike South Korea, and as New Zealand's central bank appears set to do at Wednesday's meeting -- focusing instead on pushing the economy to full employment.
Prices surge
Prices nationally have risen at more than 10-times the pace of wages, raising a major barrier to entry for first-home buyers and highlighting the downside to the RBA's emergency stimulus. Australia already has one of the highest debt-to-income ratios in the developed world.
Data Friday showed prices climbed 17.6 per cent in the first nine months of this year.
About one-in-five new loans are being approved at levels six-times borrowers' incomes, a level viewed as higher risk. The RBA is worried that over-extended households will find themselves in a precarious position in the event of job losses or when rates eventually rise.
Australian banks' average assessment to determine borrowing capacity is currently done at an upper interest rate of 5.4 per cent, almost two percentage points lower than the 7.3 per cent used two years ago.
In 2017, when prices were soaring, Australia's banking regulator introduced restrictions so that home lenders had to limit interest-only loans -- typically favored by investors -- to 30 per cent of total new residential mortgages. At the time, they were running close to 40 per cent. - Bloomberg