By Scott Murdoch
(Reuters) -Australia’s banking regulator will impose its first cap on high debt-to-income home loans from February, moving to curb housing risks as property prices surge and credit growth accelerates.
The Australian Prudential Regulation Authority (APRA) said on Thursday authorised institutions will only be allowed to issue up to 20% of new home loans at six times borrowers’ income or higher. The cap will apply to owner-occupier and investor lending but will not be imposed on new housing.
About 10% of new investor loans and 4% of owner-occupied loans sit at or above the six times debt-to-income level at the moment, according to APRA figures.
“We can see signs of housing-related risks building and we are going early,” said APRA chairperson John Lonsdale.
“We believe introducing limits or guard rails now will help mitigate risks stemming from high-risk lending and be less disruptive than waiting.”
The Australian banking sector is more exposed to residential mortgages than most others around the world which makes the domestic financial system susceptible to housing-related shocks, Lonsdale said.
Across the banking sector, regulatory data shows that about 6% of new loans are at or above six times debt-to-income, while about 50% are written at about four to six times that benchmark. The remaining 44% sits at less than four times.
Australia’s S&P/ASX200 financials index, which tracks banking stocks, was 0.56% higher on Thursday.
NEXT RATE MOVE COULD BE UP
The intervention is the first time APRA has implemented debt-to-income (DTI) limits for the banks and the first change in loan rules since 2017, when it put caps on interest-only lending.
The rules are in line with restrictions New Zealand introduced last year. Canada this year also introduced loan to income restrictions.
“Australia has a strong and safe financial system but these are prudent steps to maintain responsible lending,” Treasurer Jim Chalmers said.
“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.”
The move to rein in riskier lending from APRA came after three interest rate cuts this year and a government policy to help first-home buyers reignited the housing market, propelling prices to record highs.
At the same time, investor loans, which typically carry higher DTI ratios, drove housing credit growth above its long-term average, APRA said. The latest data showed home loans to investors surged 18% last quarter.
Financial markets have priced out any chance of further policy easing from the Reserve Bank of Australia next year, with some economists arguing the next move in the cash rate, currently at 3.6%, could be up.
The Australian Banking Association welcomed the exemption for new housing loans, saying it would help maintain supply.
“It is important that settings maintain access to safe financing through banks and not create barriers that could unduly push borrowers into higher-risk non-bank lenders,” Chief Executive Simon Birmingham said.
(Reporting by Scott Murdoch in Sydney; additional reporting Stella Qiu in Sydney and Roshan Thomas in Bengaluru; Editing by David Gregorio and Sonali Paul)
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