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Australia's tighter home loan rules more of a prudential move

Tighter rules for home loans in Australia are more a reflection of the regulator's concern about potential housing bubbles than a move to crush the market amid an economic recovery, analysts said.

The Australian Prudential Regulation Authority, or APRA, on Oct. 6 asked banks to assess new borrowers' ability to meet their loan repayments at an interest rate that is at least 3 percentage points above the loan product rate, from the previous buffer of 2.5 percentage points, to ensure that the financial system stays safe.

"APRA is concerned about credit growth driven by lending to highly indebted borrowers," said Nico DeLange, a banking analyst at S&P Global Ratings. "Generally, the tools used should address the risk. We have not quantified the impact, but lifting the serviceability buffer will reduce the borrowing capacity of new highly indebted borrowers."

Housing prices will likely remain elevated due to low interest rates, supply constraints and the arrival of new migrants once borders reopen, according to Ratings' July 2021 banking outlook.

The tighter rules on home loans didn't come as a big surprise to Omkar Joshi, principal at Opal Capital. "I think the changes today will have some impact on the housing market, but they are not as significant as they could have potentially been if APRA had imposed interest rate floors or caps on high debt-to-income borrowing," Joshi told S&P Global Market Intelligence in an email.

APRA Chair Wayne Byres said that while the banking system is well capitalized and lending standards have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building.

Australia's low interest rates and rising house prices have put pressure on household indebtedness. The Reserve Bank of Australia, or RBA, slashed its benchmark rate to a record low of 0.10% in November 2020 to support the economy during the COVID-19 pandemic. Housing prices in eight capital cities increased 16.8% in the fiscal year that ended June, according to an Australian Bureau of Statistics report released Sept. 14. The nation's economy expanded 9.6% in the fiscal year ended June, though RBA Governor Philip Lowe said the latest outbreak of the delta variant of COVID-19 interrupted the economic recovery and gross domestic product is expected to have declined marginally in the September quarter.

APRA said the new requirements will have a fairly modest impact on aggregate housing credit growth. The regulator is not seeking to target the level of housing prices, but it wants to ensure that mortgage lending is conducted on a prudent basis. APRA said it is not ruling out further measures in the future.