Around 22 per cent of borrowers are now borrowing in excess of six times their income, according to the most recent figures
Australia’s property prices have surprised many experts by booming during the COVID-19 pandemic, but it’s not the outright cost of housing that’s got banking authorities worried.
Instead, the level of highly-leveraged lending activity during the pandemic has the Reserve Bank of Australia on high alert.
In a speech on housing last week, RBA Deputy Governor Michelle Bullock raised concerns about the growth in credit exceeding the growth in incomes.
A high level of debt could pose risks to the economy in the event of a shock to household incomes or a sharp decline in housing prices, she said.
Around 22 per cent of borrowers are now borrowing in excess of six times their income, according to the most recent figures.
Whether or not there is need to consider macro-prudential tools to address these risks is something we are continually assessing, Ms Bullock said.
This week there have been reports that Treasurer Josh Frydenberg has given the go ahead to regulators to enact new curbs on lending activity in order to clamp down on risky borrowing activity, limiting the size of new loans that can be taken out by borrowers proportionate to their income.
Any new policies will be enacted by the Australian Prudential Regulation Authority (APRA), the banking sector’s peak regulatory body.
APRA has the power to dictate the conditions lenders must satisfy before issuing a loan to borrowers. It is likely to do so in consultation with the Council of Financial Regulators (CFR), of which it is a member alongside the RBA, the Australian Securities and Investments Commission and the Treasury.
It’s not the first time lending curbs have been instituted by the prudential regulator in response to credit growth.
CoreLogic head of residential research Eliza Owen explained that a spike in investor lending, as a result of low interest rates, in the first half of the previous decade had convinced APRA, in consultation with the CFR, to enact stricter lending conditions.
ABS housing finance data suggests that by April 2015, the value of housing finance lent for the purchase of investment property represented 46 per cent of all finance commitments for property purchases – in other words, investors were making up almost half of the market. In NSW, this proportion peaked at 55.5 per cent in the same month – more money was being borrowed for investment housing than owner-occupied housing, she said.
While the RBA at that time would not specifically address rising house prices, they would work with the council of financial regulators to ensure sound lending standards, she said.
In December 2014, APRA put a speed limit on growth in housing lending to investors of 10 per cent per year, with supervisory actions to be considered for banks that did not comply. This was a temporary measure that was repealed in 2018. In addition, assessment serviceability rates for home loan repayments had a recommenced floor of 7 per cent, to ensure people could repay loans at higher rates. This was eased in mid-2019.
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