It was only a matter of time, but Canberra has green lit an intervention into Australia’s lending market after 12 months of record-breaking price growth.
Australian property buyers looking to get leveraged to the hilt will soon be turned away by lenders, as Treasurer Josh Frydenberg flags tighter regulation.
“We must be mindful of the balance between credit and income growth to prevent the build-up of future risks in the financial system,” Frydenberg told The Australian Financial Review.
“Carefully targeted and timely adjustments are sometimes necessary.”
Of specific concern is the rising number of borrowers taking out loans larger than six times the size of their incomes. Around 22% of all borrowers are now above that key risk metric, according to the most recent data, as home buyers and investors attempt to keep pace with runaway prices.
It is expected the Council of Financial Regulators (CFR), which includes the Reserve Bank (RBA), APRA, Treasury and ASIC, will specifically hone in on this measure, limiting the borrowing power of new loan applicants.
The action would most likely freeze out investors before it blocks home buyers, given the tendency of the former to own multiple properties.
Frydenberg noted a”positive feature” of the current boom had been that it had been driven by home buyers rather than investors, but added that regulators were considering a “range of tools” to maintain lending standards.
While ultimate responsibility lies with APRA to implement new lending restrictions, the RBA has grown increasingly concerned over recent months as record low interest rates have enabled house prices to skyrocket, simultaneously raising household debt and financial risks.
Despite being the biggest beneficiaries of a strong market, the major banks have also sounded the alarm. Commonwealth Bank CEO Matt Comyn last week said action needed to be taken “sooner rather than later” with the nation’s largest bank raising its loan buffer on its own initiative in preparation of future interest rate hikes.
ANZ Bank CEO Shayne Elliott similarly told policymakers it had begun to turn away higher risk borrowers, saying risk management had now become more important than market share.
At an annual rate of 7% per year, credit growth has outstripped wages growth – the central bank’s number one priority – by more than two to more.
While the AFR reports no timeline has been set, Frydenberg’s comments pave the way for new restrictions in the coming weeks and months.
Whether it will be sufficient to slow price growth – a by-product, not the aim of tougher lending standards – remains to be seen.