Aussie regulator urges growth limits for investment mortgages

SYDNEY — Australia’s financial services prudential regulator has called on banks to limit the growth in home loans to investors to 10 per cent a year, adding that it will step up oversight of mortgages amid surging house prices in Sydney and Melbourne.

Banks should add a 2 per cent buffer to their home-loan rates and have an interest-rate floor of at least 7 per cent when assessing a borrower’s ability to repay a mortgage, the Australian Prudential Regulation Authority (APRA) said yesterday. APRA will review lending practices in the first quarter of next year to assess if further action is needed for individual banks, including increases in capital requirements, it said.

Growth in mortgages to property investors “above a threshold of 10 per cent will be an important risk indicator for APRA supervisors in considering the need for further action”, the regulator said.

“At this point in time, APRA does not propose to introduce across-the-board increases in capital requirements, or caps on particular types of loans, to address current risks in the housing sector,” it added.

Regulators are concerned that speculative buying of homes to rent is creating an unbalanced housing market. Home loans to landlords account for more than half of all mortgages, the highest share on record, and housing prices have soared 13.2 per cent in Sydney in the year through November and 8.3 per cent in Melbourne.

“This is a measured and targeted response to emerging pressures in the housing market. These steps represent a dialling up in the intensity of APRA’s supervision,” said the authority’s chairman Wayne Byres.

The regulator said it would also pay particular attention to high loan-to-income and high loan-to-valuation mortgages, interest-only loans to owner-occupiers as well as loans with very long terms.

Housing-loan approvals to investors are almost 90 per cent higher in New South Wales than two years ago and 50 per cent higher over the same period in Victoria, the Reserve Bank of Australia (RBA) said in its financial stability review in September. Growth in credit to housing investors was 9.9 per cent in the 12 months through October, said the latest RBA data.

The central bank, having dismissed the idea of macroprudential measures earlier in the year, said in September that investors were distorting the market and that it was discussing with regulators, including APRA, on introducing curbs. The RBA is grappling with the same conundrum that drove its counterparts from the United Kingdom to New Zealand to tighten lending rules and slow housing while keeping interest rates low to boost the economy.

“The composition of housing and mortgage markets is becoming unbalanced, with new lending to investors being out of proportion to rental housing’s share of the housing stock,” the central bank said. “Strong investor demand can be a sign of speculative excess.”

The move by APRA comes after the Australian government last month proposed tightening rules on foreign homebuyers, who may soon need to pay an application fee of up to A$1,500 (S$1,630) when buying a residential property. Those who breach ownership regulations will have to forfeit their capital gains and face civil penalties. BLOOMBERG