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A crackdown on risky lending will limit banks’ capacity to extend large mortgages, as the financial regulator launches a pre-emptive strike against the growing excesses of an overheated property market.
The Australian Prudential Regulation Authority announced a 20% cap on the share of new lending banks can do at a debt-to-income ratio above six – a mortgage worth more than six times the borrower’s income. While Jim Chalmers said the move would “help with financial resilience and housing affordability”, the Greens immediately criticised it as insufficient.
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The newly announced restriction lands amid breakneck growth in property prices and credit, with a recent report highlighting that a typical household needs to dedicate nearly half of its pre-tax pay to service the average new mortgage.
An explosion in lending to landlords has been of particular concern to regulators. Property investors account for two in five new loans, and the value of investor lending surged by 18% in the September quarter alone.
Investors returning to 2014-era dominance
The lending restriction will start in February, and Apra’s chair, John Lonsdale, said the regulator was prepared to intervene further.
“We will consider additional limits, including investor-specific limits, if we see macro-financial risks significantly rising or a deterioration in lending standards,” he said.
It has been a decade since the regulator last intervened to put speed limits on runaway lending, dragging down home prices.
Whether the latest move will make a meaningful difference is unclear: Apra data shows only one in 10 new loans to investors are made at debt-to-income ratios of six or more, and one in 25 owner-occupier loans.
Chalmers said the new restrictions were “prudent steps to maintain responsible lending”.
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“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.”
But Greens senator Barbara Pocock said the move, while a welcome start, did not go far enough and that “first-home buyers are being priced out by investors at weekend auctions”.
“Apra must use all the tools in their toolbox to rein in investor lending that is exacerbating the housing affordability crisis,” Pocock said.
