Australia is just months away from a property lending crackdown, according to ANZ – here’s what it could look like

Regulators are set to step into Australia’s property market. (Steve Christo, Corbis via Getty Images)
  • Financial regulators are set to step into Australia’s red hot real estate market, ANZ warns.
  • The bank’s economics team expect a lending crackdown in the next few months as the Reserve Bank becomes increasingly concerned with lending growth.
  • Speaking this week, RBA Governor Philip Lowe has revealed the five different types of restrictions regulators are considering.
  • Visit Business Insider Australia’s homepage for more stories.

Australian borrowers will face tougher restrictions when trying to purchase a property, as one of Australia’s largest banks warns a lending crackdown is fast-approaching.

ANZ has revealed it expects financial regulators to intervene in the red hot real estate market, as record lending continues to fuel a price boom.

In a note on Thursday, economists Felicity Emmett and Adelaide Timbrell said tougher lending limits “look likely within the next few months” as Australians load up on debt in a bid to get onto the property ladder.

“Housing finance continues to rise rapidly, with investor lending now surging. This points to a further sharp acceleration in credit growth, which is set to outstrip income growth by a significant margin, something that regulators have highlighted as a criterion for acting,” they wrote.

It comes just two days after Reserve Bank of Australia (RBA) Governor Philip Lowe surfaced for a rare Q&A session, as the central bank reevaluates the economic recovery.

Speaking publicly, Lowe suggested that, while the RBA had faith in Australian lending standards, it has become increasingly concerned with credit growth.

“It’s not in the country’s long term interest to have debt increasing at a much higher rate than their incomes,” he said.

It was the strongest indication yet from the RBA Board that it was getting ready to act, after successive interest rate cuts cut helped push Australians into a $1 billion a day spending spree.

In a follow-up event on Thursday, Lowe unsurprisingly ruled out using a rate hike to deter borrowers, saying “it would be the wrong thing to do and I don’t think it would work.”

With Australians trying to repay one of the highest levels of household debt in the world, any additional financial stress could risk broader economic repercussions, such as loan defaults and forced sales.

Regulators will try to fine-tune a slowdown

The RBA’s choice instrument in this case remains introducing macroprudential controls to limit how much different kinds of buyers can borrower when they front up to a lender.

While these restrictions would ultimately be issued by the lending watchdog APRA, it would work with the RBA to determine what measures were appropriate. Certainly, the Council of Financial Regulators (CFR) which both form a part of alongside Treasury, said it is deciding the best course of action behind closed doors, after New Zealand took action earlier this year.

On Tuesday, Lowe disclosed the exact options regulators are considering.

The first is increasing the buffer zone on loans. Currently lenders can only approve loans where the borrower could afford repayments if the mortgage rate rose by 2.5 percentage points. With interest rates at a record low, it would give borrowers more breathing room should rates be hiked as early as next year.

The second is placing restrictions on borrowers who try to borrow large amounts of money with a minimal deposit, called a high loan to value ratio (LVR). Generally considered higher risk, limiting the proportion of these buyers would help take some heat out of the market.

Third in the firing line are high debt to income (DTI) loans. In other words, the RBA would shut out those borrowing to their absolute limit, although Lowe indicated Australians rarely borrow every cent they can.

Lowe has also floated the idea that investors and interest-only loans could be restricted or shut out, although neither of these lending types are at historic highs.

“The strongest likelihood”, according to ANZ, is that regulators will choose more than one restriction to cool the market, depending on how lending evolves “over the next couple of months”.

But right now the warning signs are flashing red, as property prices grow ten times faster than wages.

“The latest data show that pressure to cool the housing market has intensified. Housing finance commitments rose 4.9% month on month in May and are up a massive 95% over the past year,” Emmett and Timbrell said.

“Moreover, investor lending is accelerating, rising more than 30% over the past three months, suggesting that a speculative element is emerging in the market.”

Credit growth is currently tracking at 7%, the highest since 2015 when APRA last introduced lending restrictions. ANZ forecasts it to climb high still in the coming years, even assuming rising interest rates and an intervention happens.

“Fine tuning a gentle slowdown in the housing market will be a challenge. The regulators will want to avoid triggering a sharp turnaround in house prices, so we expect they will go lightly in the first instance.”