APRA prepares for more rules on 'risky' housing finance sector

The Australian Prudential Regulation Authority is ready to follow up the steps it took in December to limit investor lending if it sees the need to take further measures to contain housing market risks.

APRA's submission to the Senate Standing Committee on Economics inquiry into home ownership outlines a number of measures the regulator has ready in its toolkit, including "additional measures to strengthen lending standards, additional capital requirements for individual authorised deposit-taking institutions, higher capital requirements for certain types of higher risk lending and the application of counter-cyclical buffers."

APRA said it had not ruled out the use of macroprudential tools of the kind used by other countries, such as limits on high loan-to-valuation ratio lending, even though its view is that such policies can be challenging to implement and may penalise first-home buyers who typically have a small deposit.

In December APRA wrote to ADIs saying that investor mortgage portfolio growth "materially above a threshold of ten per cent" would be seen as "an important risk indicator" in considering the need for further action. It also recommended that lenders tighten their serviceability buffers.

In its submission to the Senate Committee APRA said its aim was to reinforce sound lending behaviour in an environment of heightened risk. The heightened risk is characterised by historically low interest rates, high household debt, subdued income growth, unemployment that has drifted higher, significant house price growth and strong competitive pressures.

The regulator said: "APRA's actions are not directed at housing affordability. It is not seeking to determine an appropriate level of house prices, household debt or other parameters. Its objective is to ensure prudent lending behaviour."

APRA said the available evidence suggested that its December initiatives were having some success in moderating the lending behaviour of "those ADIs pursuing higher risk strategies", with the growth of investment lending appearing to have begun to plateau.

The submission said: "Feedback to ADIs has resulted in changes to serviceability parameters. Buffers are now in the range of 2.25 per cent (up from as little as 1.5 per cent) with an assessment rate floor of 7.25 per cent (up from 6.5 per cent) and, in some cases, eight per cent.

"Imposition of these higher buffers will tend to reduce the maximum loan size available to marginal borrowers."

In addition, interest-only periods are coming in from ten or 15 years to five years or less, and banks are working on better recognition of borrowers' income and expenses.

However, APRA said there was still room for improvement.