Pump the brakes: Lending restrictions slapped on banks as property risks grow

The brakes on the nation’s runaway property market have been tapped by regulators with new restrictions on highly leveraged investors and mortgage borrowers aimed at preventing the emergence of new financial risks across the banking sector.

With signs of a surge in investor activity, the Australian Prudential Regulation Authority on Thursday revealed it would limit loans made by banks to people whose total debt would be at least six times their income.

From February 1, the macroprudential limits will mean no more than 20 per cent of banks’ new mortgage lending will be available to customers borrowing six times their income or more. The restrictions will apply to both housing investors and owner-occupiers.

At the same time, house values in all capital cities have climbed faster than inflation, putting further pressure on prospective borrowers to take out larger mortgages.

APRA chair John Lonsdale said the authority was taking pre-emptive action because it was not prepared to wait for housing-related vulnerabilities to build up in the financial sector.

He told a media briefing that 10 per cent of property investor loans were currently going to people borrowing six or more times their income, and only 4 per cent of owner-occupier loans.

“That means that in the near term, these new limits won’t be binding on most banks, so we will have little impact on the aggregate flow of credit to either owner-occupiers or investors,” he said.

“But we have seen in the past that risks can build quickly and we want to be prepared.”

One key risk is a deterioration in lending standards as banks seek to win more customers, exposing financial institutions to a jump in mortgage delinquencies in the case of an economic slowdown.

The move excludes bridging loans for owner-occupiers and loans for the purchase or construction of new homes. APRA’s current 3 per cent mortgage buffer will remain in place.

The authority has previously used macroprudential regulations to calm the property market.

In 2017, it restricted interest-free loans in a move that helped curb house price growth, which at the time was climbing by 14 per cent annually in Sydney and Melbourne. Within a year, prices were static.

Treasurer Jim Chalmers described APRA’s actions as “prudent steps” that would maintain responsible lending.

“These are important changes that will help with financial resilience and housing affordability,” he said. “It’s about managing emerging risks in our financial system and will help people into the market.

“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.”

Opposition housing spokesman Andrew Bragg said APRA’s move was a warning that the government’s 5 per cent deposit scheme for first home buyers was pushing banks to take on more financial risk.

“APRA has acted. They are smashing Labor’s 5 per cent mortgages with new rules. They are directly undermining Labor’s reckless policymaking,” he said.

“APRA is telling Anthony Albanese and [Housing Minister] Clare O’Neil to stop doing stupid stuff.”

But the Greens said APRA should go further, arguing $40 billion had gone to investors over the past three months, making the nation’s housing affordability crisis worse.

“This housing crisis is heading toward a point where it may be impossible to reverse without immediate, decisive action. We urgently need to cool the overheated credit market for property investors,” Green spokeswoman Barbara Pocock said.

Australian Banking Association chief executive Simon Birmingham said APRA’s intervention was “targeted and considered”.

“It is important that settings maintain access to safe financing through banks and not create any barriers that could unduly push borrowers into higher-risk non-bank lenders,” he said.

Birmingham said the best way to improve housing affordability was by increasing the supply of homes.

AMP chief economist Shane Oliver said the intervention was a sign APRA wanted to clamp down on risks in the property market, after a surge in lending.

“I think this is like a shot across the bows because APRA has seen the housing finance figures go through the roof lately,” he said.

“They are just getting worried that if we don’t get on top of this early, this might get out of control.”

Oliver said APRA’s action would contribute to slower house price growth, alongside the fact that markets had cut their expectations for interest rate cuts.

AMP is forecasting house price growth of about 5 per cent next year, down from 8 per cent.

Home Loan Experts mortgage broker Siddhartha Bajracharya said APRA’s intervention could help first home buyers by taking heat out of the property investor market.

“I think the government is trying to limit the investors so that the property prices don’t go up drastically, which helps the first home buyer,” he said.

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