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Sydney - Australian regulators said on Tuesday that they would take a tougher line on risky mortgage lending, seeking to pre-empt the threat of a housing bubble and targeting a key plank of growth for the country's major banks.
The moves, aimed predominantly at housing investors, followed warnings from the central bank about the growing risk posed by rapidly rising house prices in Australia's major cities - already among the world's most expensive.
But they fell short of the widespread macro prudential measures that some market watchers had feared, setting targets that most banks were already meeting.
The Australian Prudential Regulation Authority (Apra) told banks to limit growth in loans to investors to 10% per year. Banks should add a 2% interest rate buffer on mortgages and have an interest rate floor of 7% while assessing borrowers' ability to repay their loans, it added.
"These steps represent a dialling-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)," Apra chairperson Wayne Byres said in a statement.
The Australian Securities & Investment Commission (Asic), in a separate statement, said it was ramping up surveillance into interest-only loans, a favourite with housing investors who enjoy big tax benefits with highly geared properties.
"This is much more targeted approach to identify and address institutions that are deemed to be not prudent in terms of lending practices by Apra, or not compliant with responsible lending laws by Asic," said Credit Suisse analyst James Ellis.
Booming in investor lending
On Sunday, a major inquiry into Australia's financial system recommended banks hold more capital to guard against risks, including their heavy reliance on mortgage lending.
Mortgages provide the bulk of profits for Australia's big four banks - Commonwealth Bank of Australia, Westpac Banking, Australia and New Zealand Banking Group and National Australia Bank.
Lending to investors has jumped this year to its highest since comparable records started in 1991, accounting for about half of Australia's residential loans in value terms.
Interest-only loans as a percentage of new housing loan approvals by banks reached a new high of 42.5% in the September quarter, Asic said, fuelling price gains.
House prices in major cities are growing at close to 10% annually, pushing prices to the point where many first-time home buyers are struggling to get into the market.
The median price of a home in Sydney hit A$705 000 last month, according to an industry survey.
In the first quarter of 2015, Apra said it would review banks' lending practices and may take "supervisory actions" including raising capital levels for any erring lender.
The Reserve Bank of Australia earlier this year raised concerns that too much speculation was increasing the risk of a sharp correction in housing prices which could ripple through the economy.
Last month, stress tests showed a severe housing market collapse could ravage Australian bank earnings and capital levels.
