Regulators are in talks about possible restrictions in lending based on debt-to-income ratios.

Single-income borrowers will likely face the greatest consequence if the recent talks about a potential crackdown on lending become reality.

BuyersBuyers co-founder Pete Wargent said the plans to target the higher debt-to-income lending would likely be detrimental to single-income earners who are planning to enter the housing market.

"Single-income earners might find that they can’t borrow as much next year, which will make life tricky for those struggling to get into the housing market," Mr Wargent said.

"Similar measures have been used in other markets, including the UK, and the results were mixed. For example, there was a sharp increase in joint income borrowers, and a marked decline in first-home buyers on a single income.”

Mr Wargent said putting a cap on debt-to-income ratios would likely reshape the mortgage market, as accessibility would likely worsen for first-home buyers and single-income earners.

"The benefits to financial stability are up for debate, but it’s very likely that such a move would knock more first homebuyers and single income earners out of the market, at the expense of higher-income upgraders and joint income loan applicants," he said.

Quarterly figures from the Australian Prudential Regulation Authority (APRA) showed that 21.9% of new mortgages are from borrowers with debt-to-income ratios of above six. This share has been increasing since the third quarter of 2020.

In August, owner-occupier lending has grown by 0.7% or $9.1bn in August while investment housing lending has increased by 0.4% or $1.1bn.

What regulators are worried about

In its quarterly statement, the Council of Financial Regulators (CFR) expressed worries about the medium-term economic risks of the stronger pace of household debt compared to income.

"Housing credit growth picked up over the first half of the year among both owner-occupiers and investors. The recent lockdowns have reduced transactions and new listings, but prices are still rising briskly in most markets," the statement said.

CFR said APRA will plan to publish an information paper on its framework for implementing macroprudential policy over the next few months.

The International Monetary Fund (IMF) recently suggested the tightening of macroprudential policies to address the gradually rising financial stability risks in Australia.

"While the surge in housing prices has been driven largely by owner-occupiers taking advantage of low mortgage rates and fiscal support programs, high debt-to-income mortgages are on the rise amid elevated household debt, and investor demand has begun to increase from low levels," IMF said.

The RBA earlier expressed similar concerns, with its assistant governor Michelle Bullock saying that previous policies are not relevant anymore as the source of risks have already changed.

"Unlike in 2014 and 2017, the concerns this time are not specific types of lending such as investor or interest only lending," Ms Bullock said.

"This suggests that if there were to be a need for so-called macro-prudential tools to address rising risks, they should be targeted at the risks arising from highly-indebted borrowers."

Ms Bullock believes that the more relevant solution in the current context of the market involves addressing serviceability of loans and the amount of credit that can be obtained by individual borrowers.

“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.

“It is these macro-financial risks that warrant close watching. Whether or not there is need to consider macroprudential tools to address these risks is something we are continually assessing.”

Photo by Christopher Lemercier on Unsplash