APRA steps in to curb mortgage debt with increased interest rate buffer

In a move that many had been anticipating, the Australian Prudential Regulatory Authority (APRA) has stepped in to curb household mortgage debt, announcing stricter lending conditions.

This morning, the regulator indicated it had written to mortgage lenders and banks, advising them it had increased the minimum interest rate buffer that is used when assessing the serviceability of home loan applications.

APRA told lenders it now expects they 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. This compares to the buffer of 2.5 percentage points that is commonly used.

APRA noted their decision reflected growing financial stability risks in residential mortgage lending.

The decision comes after the Reserve Bank of Australia yesterday indicated concern over housing credit growth.

While maintaining the historically low cash rate of 0.1 per cent at its monthly board meeting yesterday RBA Governor Dr Philip Lowe noted housing prices were continuing to rise.

“Housing credit growth has picked up due to stronger demand for credit by both owner-occupiers and investors,” Dr Lowe said.

“The Council of Financial Regulators has been discussing the medium-term risks to macroeconomic stability of rapid credit growth at a time of historically low interest rates.

“In this environment, it is important that lending standards are maintained and that loan serviceability buffers are appropriate.”

APRA explained their decision to increase the interest rate buffer had the support of the RBA along with other members of the Council of Financial Regulators including the Treasury and Australian Securities and Investment Commission.

APRA Chair Wayne Byres said the action was “targeted and judicious” and 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,” Mr 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.

“More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income, and at an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead. 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,” Mr Byres said.

Together with other members of the Council of Financial Regulators, APRA said they would continue to closely monitor risks in residential mortgage lending, and vowed to take further steps if necessary. 

The real estate industry reacts

The Agency Chief Executive Officer Geoff Lucas welcomed APRA’s decision as “prudent management” .

“The jawboning that has been happening for the past two to three weeks by the RBA and APRA has been a healthy thing to get consumers’ in the mindset that there will be tightening regulations,” he said.

“That’s a good thing. That’s also saying that they’re concerned that the rate of price increase is excessive, so this helps water it down.”

Mr Lucas said the move would make it tougher for buyers to borrow and would taper price growth, especially as more properties come to market.

“That’s consistent with our view as to why we think during calendar 2022, the rate of price growth will be lower,” he said.

“We believe between four and six per cent. It will dampen buyer demand slightly. It’s prudent management to dampen excessive buyer demand.”

Mr Lucas also urged buyers, particularly new generation buyers, to temper their view of the real estate market.

“The real estate market is not a get rich, quick scheme,” he said.

“It is for long-term investment. And I think too much over the last couple of years, people have seen spectacular price gains. And they’re seeing it as a mechanism for immediate wealth generation, and it is not.”

Mr Lucas said there was concern about Australian’s level of debt compared to household income.

“That’s fine when interest rates are low, we know they’re at all-time lows, so by definition, into the future the movement will be up,” he said.

“By managing this situation forward, APRA are making sure that people are protected into the future from interest rate increases that will eventually come.

“We don’t think it will be in the immediate term but eventually it will.”

Housing Industry of Australia Chief Economist Tim Reardon said the stricter lending conditions would make home ownership harder.

“Over 90 per cent of renters aspire to own their own home but less than half of them expect that they will ever achieve this goal,” he said.

“Today’s announcement from APRA will make this goal even harder.”

Mr Reardon said Australia had a strong financial sector that had withstood the Global Financial Crisis and the COVID recession and questioned APRA’s move now.

“The share of loans that are impaired is exceptionally low, at around 0.4 per cent of all loans issued,” he said.

“This is significantly lower than in other developed economies. The very low levels of mortgage delinquency in Australia reflect the restrictive lending regulations imposed by financial regulators in Australia.

“Since 2010 financial regulations have made it increasingly conservative, making it progressively more difficult for first-home buyers to enter the market.”

The Property Council of Australia said it understood the rationale behind APRA’s move but called for impacts from the tighter lending conditions to be monitored into 2022, before any further action is considered.

Property Council Chief Executive Officer Ken Morrison said the loan eligibility tests needed to be monitored to ensure broader market confidence was not sapped during Australia’s economic recovery.

“Australia’s residential housing market is worth almost $10 trillion and housing represents the bedrock asset of many Australian families,” he said.

“This move comes when fiscal stimulus and the HomeBuilder effect are withdrawing from the economy, the successful transition out of lockdown of our two largest states has yet to occur, and net overseas migration is still negative.

“Strong housing construction has underpinned Australia’s economic resilience through the pandemic and supports more jobs per dollar spent than any other industry and this should never be taken for granted.

“We urge the Government and the regulator to keep a patient focus on the impacts of these changes until the new year and to target their communications accordingly.”

More to come…

Related story: Industry leaders analyse what RBA decision means for real estate market

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Cassandra Charlesworth

Cassandra Charlesworth is a features writer for Elite Agent Magazine with over 15 years’ journalism experience in metropolitan and regional newsrooms. She has a specialist interest in real estate, tech disruption and a good old-fashioned “yarn”.

Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.