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DTI lending caps touted as future credit curbs

Regulators could move to set caps on loan volumes for borrowers with high debt-to-income ratios if the housing market recovery continues to accelerate, according to analysts.

Over the past few months, the housing market has shown signs of recovery after a prolonged period of subdued activity, which saw national home values fall 8.3 per cent peak-to-trough.

The latest data from property research group CoreLogic revealed that national home values increased 0.8 per cent in August, the first monthly increase since the downturn commenced.

The national uptick was driven by improvements in Sydney and Melbourne, where, over the past few months, home values have risen by a cumulative 1.9 per cent and 1.8 per cent, respectively.


However, according to CoreLogic research analyst Cameron Kusher, a sharper than anticipated housing recovery could spark a new wave of macro-prudential curbs from the Australian Prudential Regulation Authority (APRA).

“I think that we’ll continue to see values rise, but I think if we continue to see them rise rapidly, we might see another round of macro-prudential policies introduced,” he told Mortgage Business.

“[Such measures could be introduced] not just because prices are increasing but because of the risks around increasing household debt and lower interest rates leading to higher dwelling values rather than broader stimulus for the economy, which is what the regulators are looking for.”

APRA introduced a range of reforms that commenced in 2014, designed to improve credit quality, with such reforms including a cap on investor and interest-only lending, and the introduction of a 7 per cent interest rate floor for mortgage serviceability assessments.

The prudential regulator has since scrapped the curbs, a move in which analysts have partly attributed to the bounce in housing sentiment.

However, Mr Kusher said that prospective lending curbs would not resemble APRA’s previous measures and touted the possibility of lending caps for borrowers with high debt-to-income ratios.

“We know that other parts of the world have gone down that path and it’s been quite successful, so I think if they were to introduce macro-prudential policy, it would be something we haven’t seen previously,” he said.

“It would be aimed at limiting the increasing debt that households are taking on.

“In my mind, that’s probably the one most appropriate.”

Mr Kusher echoed the sentiments of his colleague, CoreLogic head of research Tim Lawless, who also flagged the potential for loan-to-value ratio (LVR) restrictions.

“Limiting lending to borrowers on high debt-to-income ratios could be one option, or introducing hard limits on high LVR lending could be another mechanism that would reduce the risk of a further build up in household debt whilst at the same time allow borrowers to access housing credit and take advantage such low interest rates,” Mr Lawless has said.

Further, Mr Kusher expects macro-prudential policy to continue to play a role in the lending space, noting that the “effectiveness” of previous curbs has set a precedent for future regulatory action.  

“We know that the rhetoric from the Reserve Bank before [APRA] introduced [previous curbs] was, ‘I don’t know that they’re necessarily going to be effective and needed’,” he said. “However, I think both the Reserve Bank and APRA now see that when you use them, they can be very effective.”

He concluded: “I think macro-prudential policies are certainly part of the policy toolkit that will be used going forward.”

[Related: Investor lull could ‘sow seeds’ of housing ‘upswing’]

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