(Bloomberg) – Australia’s banking regulator has increased the minimum interest rate cushion that lenders should consider when assessing mortgage applications, citing growing risks to the financial stability of a housing market in booming.
Bloomberg’s Most Read
The Australian Prudential Regulation Authority has told lenders it expects them to assess the ability of new borrowers to repay their loans at an interest rate at least 3 percentage points higher than the product rate. loan, according to a statement released Wednesday. This is up from the 2.5 percentage points commonly used by banks today.
House prices are skyrocketing in response to ultra-low interest rates, a phenomenon seen in the developed world as central banks relax policies to support economies during the pandemic. The International Monetary Fund has urged Australia to introduce restrictions on lending, warning that soaring house prices raise issues of affordability and financial stability.
“This is in line with what we expected, albeit a little earlier, and will help temper credit growth, especially for those who are most in debt and for investors as well,” said Su-Lin Ong, Australian head of economy and bonds. income strategy at the Royal Bank of Canada. “We would expect further macro-pru measures if this does not slow credit growth.”
The momentum of credit restrictions has strengthened, with the central bank official tasked with overseeing financial stability outlining options in a speech last month, and the latest statement from the Board of Financial Regulators indicating that APRA is considering publish a document on its macroprudential policy implementation framework over the next two months. Treasurer Josh Frydenberg also spoke on the matter.
“By taking action, APRA is working to ensure that the financial system remains secure and that banks lend to borrowers who can afford the level of debt they take on, both now and in the future. ‘future,’ the statement said.
Financial regulators are wondering how to contain the credit boom and a burning real estate market without stifling the economic recovery. The Reserve Bank of Australia has consistently said it does not plan to hike rates until 2024 at the earliest – leaving stricter lending rules as the only way to dampen the property market.
Matt Comyn, chief executive officer of the Commonwealth Bank of Australia, said the move would help ease pressure on the housing market. Shares of CBA, the nation’s largest mortgage lender, fell 2.3% as of 11:05 am in Sydney, with rival lenders showing more muted moves.
“We believe that this new step will bring additional comfort to borrowers and is a prudent measure for lenders,” he said Wednesday in an emailed statement. “We will be implementing the changes this month and expect there will be a need to consider additional measures as the lockdowns end and consumer confidence grows.”
The rapid increases in house prices in Sydney and Melbourne have come despite prolonged lockdowns, and as rising household debt raises financial stability concerns. The RBA has ruled out a tightening policy to cool asset prices – unlike South Korea, and as New Zealand’s central bank appears poised to do at Wednesday’s meeting – focusing instead on the push from the economy to full employment.
Nationwide prices have risen at more than 10 times the pace of wages, raising a major barrier to entry for first-time homebuyers and highlighting the downsides of the RBA’s emergency stimulus . Australia already has one of the highest debt-to-income ratios in the developed world.
Data on Friday showed prices had climbed 17.6% in the first nine months of this year.
About one in five new loans are approved at levels six times the borrower’s income, a level considered higher risk. The RBA fears that oversized households will find themselves in a precarious position if jobs are cut or when rates eventually rise.
The average assessment of Australian banks to determine borrowing capacity is currently carried out at a higher interest rate of 5.4%, almost 2 percentage points lower than the 7.3% used two years ago. years.
In 2017, as prices skyrocketed, Australia’s banking regulator introduced restrictions so that mortgage lenders would have to limit interest-only loans – typically favored by investors – to 30% of total new residential mortgages. At the time, they were running at almost 40%.
(Add CBA CEO comment to eighth paragraph)
Bloomberg Businessweek Most Read
© 2021 Bloomberg LP