Last Thursday, the Australian Prudential Regulation Authority (APRA) said lending standards have improved since the 10% cap on growth in new lending to property investors was introduced in late 2014. The regulator added that it was prepared to remove the cap for lenders who can demonstrate stronger lending standards.
APRA Chairman Wayne Byres said the cap will be removed on July 1 for lenders who have been operating below the benchmark rate for six months. These lenders will have to confirm that their lending standards meet APRA’s guidance on serviceability.
“Lending growth has moderated, standards have been lifted and oversight has improved,” Byres said in a statement. “However, the environment remains one of heightened risk and there are still some practices that need to be further strengthened.”
APRA now expects banks and other lenders to develop their own limits on the proportion of lending at very high-debt-to-income levels, where debt is greater than six times a borrower’s income. Limits would also have to be instituted on maximum debt-to-income levels for individual borrowers.
These limits need to take into account the total borrowings of an applicant, rather than just the loan being applied for.
Ben Jarman, senior economist and executive director at JP Morgan, said APRA’s renewed focus on loan serviceability wasn’t surprising. “This end-game has been quite clear since APRA began more forcefully requiring banks to share loan-level data this year,” he said.
It should be noted that APRA’s removal of the investor lending cap is not an easing of credit conditions, as the new restrictions on debt-to-income levels are even more stringent.
“Slower credit growth, along with limited capacity for further falls in the saving rate, will be a significant headwind for consumption in coming years,” Jarman said.