In yet another step to curb steeply rising housing prices, the Australian Prudential Regulation Authority (APRA) has asked banks to limit loans to real estate investors. They must also follow stricter guidelines to ascertain a borrower’s ability to repay the mortgage.
Financial institutions must not grow loans to investors by more than 10%, says APRA, or they could face punitive action. It also said lenders should incorporate buffers of at least 2% above loan product rates and a floor lending rate of at least 7% when determining borrowers’ ability to repay loans.
High risk lending and loans to investors will be under close scrutiny, APRA said. The regulatory body will again review Australian banks’ lending practices in the first quarter of 2015 and will take “supervisory actions” against the erring lenders. The action may include raising capital levels.
However APRA said that it is not generally considering increasing capital requirements or restrictions on particular loan types, but will keep a watch on the market.
"This is a measured and targeted response to emerging pressures in the housing market," APRA Chairman Wayne Byres said in a statement.
"These steps represent a dialing up in the intensity of APRA’s supervision, proportionate to the current level of risk and targeted at specific higher risk lending practices in individual (banks)," Byres said.
Lending to property investors in Australia is increasing at a record pace, accounting for almost half of all residential loans in value. In 2014 it reached the highest levels since comparable records started in 1991.
Mortgages account for almost two-thirds of bank loans in Australia, making financial institutions vulnerable to sharp falls in house prices, or higher unemployment.
This article was republished with permission from Global Property Guide.