Banks ordered to approve fewer risky loans as Australian property market heats up | Australian economy

A crackdown on risky loans will limit banks’ ability to extend large mortgages, as the financial regulator launches a pre-emptive strike against the growing excesses of the overheated property market.

The Australian Prudential Regulation Authority has announced a 20% cap on the share of new lending that banks can make at debt-to-income ratios above six – mortgages worth more than six times the borrower’s income. While Jim Chalmers said the move would “help fiscal flexibility and housing affordability”, the Greens immediately criticized it as inadequate.

_{Sign up: AU Breaking News Email}

The newly announced restrictions come amid a wild rise in property prices and debt, with a recent report highlighting that a typical household needs to dedicate almost half of its pre-tax payment to service the average new mortgage.

The explosion in lending to landlords has been of particular concern to regulators. Two in five new loans are to property investors, and the value of investor loans rose 18% in the September quarter alone.

Lending restrictions are set to begin in February and Aphra chairman John Lonsdale said the regulator was prepared to intervene further.

“If we see a significant increase in macro-financial risks or a deterioration in credit standards, we will consider additional limits, including investor-specific limits,” he said.

It has been a decade since the regulator last intervened to impose speed limits on flash lending, driving down house prices.

Whether the latest move will make any meaningful difference is unclear: Apra data shows that only one in 10 new loans made to investors are made at a debt-to-income ratio of six or more, and one in 25 owner-occupier loans.

Chalmers said the new restrictions were “prudent steps to maintain responsible lending”.

“These rule changes are an important way for regulators to reduce risk to our economy, but these efforts will also help when it comes to getting people home.”

But Greens senator Barbara Pocock said the move, although a welcome start, did not go far enough and “first home buyers are being priced out by investors at the weekend auctions”.

Pocock said, “Apra should use all the tools in its toolbox to rein in investor lending that is exacerbating the housing affordability crisis.”