The prudential regulator has moved to take some heat out of the housing market, raising the “serviceability buffer” that banks use to assess loans, which it says will reduce the maximum borrowing capacity for the typical borrower by around 5 per cent.
The Australian Prudential Regulation Authority has written to banks telling them to increase the buffer by 0.5 percentage points, from 2.5 per cent to 3 per cent by October 31. This buffer is added to the interest rate on the loan, and borrowers are assessed on whether they can repay with the buffer to ensure they can withstand higher interest rates in the future.
APRA said the move would have a “fairly modest” overall impact on aggregate housing credit growth. It will only apply to new borrowers.
This led some banks to suggest more macroprudential intervention would follow down the track, while APRA said it “does not rule out that the other measures might be used in the future”.
APRA has decided not to implement debt-to-income limits for now – which were being speculated as a potential move – saying these would be “operationally complex to deploy consistently” and could have resulted in higher interest rates for some borrowers because lenders would have lifted rates to ration credit to get under the limits.
Bank shares were mixed – but on balance weaker – following the news with the shares of Australia’s biggest lender the Commonwealth Bank down 1.8 per cent and ANZ down 0.1 per cent. Westpac shares were 0.1 per cent higher and NAB shares were 0.2 per cent higher.
APRA decided to move the buffer rate rather than the interest rate “floor”, another way borrowers are stress tested by banks, because lifting the floor could have had a bigger impact on owner-occupiers while the buffer would be more effective to limit lending to investors, APRA said.
The regulator requires banks to assess a customer’s ability to repay a loan based on the floor rate or the existing interest rate plus the buffer – whichever is higher. APRA used to set the floor until 2019, when responsibility was handed back to banks.
Anticipation for a handbrake on lending has been building after Commonwealth Bank CEO Matt Comyn called for action to target the floor rate and Treasurer Josh Frydenberg backed APRA’s intervention saying it had “a range of tools available”.
The Reserve Bank said on Tuesday that it was important lending standards were maintained and serviceability buffers were appropriate. APRA said targeting the buffers – as opposed to other measures such as the floor rate or debt-to-income (DTI) limits – will be more effective in restricting investor borrowing.