Australia tweaks loan buffers to cool red-hot housing market
SYDNEY (BLOOMBERG) – Australia’s banking regulator raised the minimum interest-rate buffer that lenders need to account for when assessing home-loan applications, citing growing risks to financial stability from a booming housing market.
The Australian Prudential Regulation Authority told lenders it expects them to assess new borrowers’ ability to meet loan repayments at an interest rate that is at least 3 percentage points above the loan product rate, according to a statement on Wednesday (Oct 6). That’s up from the 2.5 percentage points commonly used by banks at present.
Property prices Down Under are soaring in response to ultra-low interest rates, a phenomenon seen across the developed world as central banks eased policy to support economies during the pandemic. The International Monetary Fund has urged Australia to introduce lending curbs, warning surging house prices raised issues about affordability and financial stability.
Financial regulators are grappling with how to contain surging credit and a red-hot property market without choking off the economy’s recovery. The Reserve Bank of Australia has said consistently it doesn’t expect to raise rates until 2024 at the earliest – leaving tighter lending rules as the only way to rein in the property market.
Matt Comyn, chief executive officer of Commonwealth Bank of Australia, said the move would help take some heat out of the housing market. Shares of CBA, the country’s largest mortgage lender, slipped 2.3 per cent as of 11.05am in Sydney, with rival lenders showing more muted moves.
“We will implement the changes this month and expect that it may be necessary to consider additional steps as lockdowns end and consumer confidence increases,” he said in an e-mailed statement on Wednesday.
The rapid house-price gains in Sydney and Melbourne have come despite protracted lockdowns, and as growing household debt raises financial stability issues. The RBA has ruled out tightening policy to cool asset prices – unlike South Korea, and as New Zealand’s central bank appears set to do at Wednesday’s meeting – focusing instead on pushing the economy to full employment.
Housing prices nationally have risen at more than 10-times the pace of wages, raising a major barrier to entry for first-home buyers and highlighting the downside to the RBA’s emergency stimulus. Australia already has one of the highest debt-to-income ratios in the developed world.
Data last Friday showed prices climbed 17.6 per cent in the first nine months of this year.
About one-in-five new loans are being approved at levels six-times borrowers’ incomes, a level viewed as higher risk. The RBA is worried that over-extended households will find themselves in a precarious position in the event of job losses or when rates eventually rise.
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