Shortly after the release of the RBA Review last month, which warned that the risk of oversupply in some capital city markets is nearing, the Australian Prudential Regulation Association announced a series of changes to its mortgage lending guidance, particularly around serviceability requirements.
Addressing the Senate economics legislation committee in Canberra on October 20, APRA chairman Wayne Byres said the association’s supervisory work on housing lending standards is ongoing.
“Over the past year, we believe the industry has appreciably improved its lending standards. But risks within the housing and residential development markets remain elevated,” Mr Byres said at the time.
“Given the environment of heightened risks, our objective has been to reinforce sound lending standards, particularly in relation to the manner in which lenders assess the capacity of borrowers to service their loans,” Mr Byres said.
Speaking to Mortgage Business, AMP Capital chief economist Shane Oliver echoed this sentiment, saying that APRA is likely to “tighten the screws” further on bank’s lending standards, particularly because Sydney and Melbourne’s property markets have remained “remarkably strong”.
“Now with interest rates set to remain very low for an extended period, possibly even falling further, it will fall to APRA to try and slow things down,” he explained.
“That could take the path of lowering the growth thresholds for lending to investors. It’s currently 10 per cent, APRA might decide that it should be lowered to 6 per cent, or might [introduce] further directives along the lines of just tightening lending standards generally,” he said.
Mr Oliver said that the increasing lending criteria would likely “make it harder” for consumers to obtain a loan, particularly first home buyers.
“If we’re going to see tougher lending standards, it usually hits [FHBs] first, because those lending standards come in the form of lower loan to valuation ratios or tougher income tests,” he said.
While Mr Oliver highlighted that further lending curbs would make it more difficult for consumers to access finance, he emphasised that APRA’s actions are likely in the interest of financial stability in the economy.
“The problem I think for Australia would be if the property market continued to run as hot as it is in Sydney and Melbourne, and that could lead to a big bust, or set us up for a downturn down the track,” he said. “Ideally it’s better to cool these things down before they get totally out of hand.”