In a move to counter rising risks in home lending, the Australian Prudential Regulation Authority (APRA) yesterday upped the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.
In a letter to lenders, APRA says it expects them to assess the ability of new borrowers to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate. This compares to a buffer of 2.5 percentage points that is commonly used by lenders.
“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,” says APRA chair Wayne Byres.
“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.”
Byres says over 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.”
“Low interest rates, government grants, COVID-19 working-from-home arrangements and solid job security have translated to strong demand for homes. The RBA has also indicated that rates are unlikely to rise until 2024, further underpinning the desire to borrow to buy property,” says Craig James, chief economist at CommSec.
“At the same time, that demand for homes has been super-strong, COVID-19 has been a key factor restricting the supply of homes on the market. Potential vendors have been reluctant to list properties until there is greater certainty on lockdowns, health orders and general mobility restrictions.”
James says the result is that home prices are soaring – recording the fastest annual growth rate in 32 years. While the strong increases in home prices have boosted wealth for homeowners and home buyers, it has also meant weakening housing affordability for those looking to buy.
He says the good news is that there are a near record number of homes being built. That additional supply should lead to slower, more sustainable growth of home prices.
CBA group economists expect that home prices will lift by 7 per cent in 2022 after growing by 20-25 per cent in 2021.
“The ‘wildcard’ for the property market remains immigration, with Australia’s international borders expected to fully re-open during 2022,” says James.
RateCity.com.au says this action is in response to soaring property prices and ballooning loan sizes. The latest data from APRA shows 21.9 per cent of new loans have a debt-to-income ratio of six or more, which is considered risky.