Tighter affordability tests tipped by S&P

Measures to strengthen debt serviceability assessments are among "likelier options" that may be adopted by bank regulators in Australia to curtail prudential risks from home price growth, Standard & Poor's postulates in a new report.

S&P point to the Reserve Bank of Australia's "concern around household wealth and spending should property prices fall, amid strong interest from both investors and owner-occupiers for interest-only loans," as one rationale for expecting so-called macro-prudential policy measures.

S&P said it expects any additional measures "to extend the existing principles-based approach adopted by APRA, rather than by prescriptive limits."

Current prudential guidance expects a combination of buffers and adjustments in banks' serviceability assessments to ensure borrowers would be able to absorb substantial stress without producing unexpectedly high loan default losses for the lender, S&P said.

Increasing banks' capital requirements for specific sectors, for example by "increasing the risk-weight or applying a minimum (floor) risk weight", is also likely, S&P said.