The prudential regulator has opted for stability, holding key mortgage controls in place.
The Australian Prudential Regulation Authority (APRA) has decided to leave all of its macroprudential levers unchanged after its latest review.
In an update on Thursday (28 May), APRA confirmed that banks must continue assessing new borrowers’ capacity to repay at interest rates 3 percentage points above the product rate.
The regulator said this buffer remained a central part of its defence against shocks to household budgets.
“The serviceability buffer helps ensure that recent new borrowers can continue to service their loans in the face of higher expenses and interest rates,” APRA said.
It also reiterated that banks’ countercyclical capital buffer would stay at 1 per cent of risk‑weighted assets, preserving additional capital that could be drawn down if conditions deteriorate.
At the same time, it left high debt‑to‑income (DTI) lending settings in place, meaning banks can still write up to 20 per cent of new owner‑occupied and investor loans at DTI ratios of six times or more.
Strong buffers, but pressures building
APRA’s assessment is that households remain heavily indebted, even as signs of cooling emerge in housing activity.
It pointed to March‑quarter housing credit growth being strong for investors and around average for owner‑occupiers while acknowledging “there were signs of moderation in housing price and credit growth.”
It added that business credit growth “remained above its historical average”.
At the same time, it made clear that borrowers were increasingly feeling the strain.
APRA said that accumulated buffers – in both household finances and bank balance sheets – were doing their job, stating these strong positions meant “most households and businesses were well placed to weather the pressures”.
On the quality of new mortgage flows, APRA concluded that higher‑risk lending remained under control and that underwriting discipline was holding up.
However, it said that it was closely watching the new composition of lending.
“Based on preliminary March quarter data, high DTI lending remains well below APRA’s DTI limits and so the limits are not restricting overall bank lending. However, this type of riskier lending had been increasing over the past year and – given the uncertainty in the outlook – it is prudent for the limits to remain in place as guardrails for now,” it said.
APRA flags volatile risk landscape
APRA chair John Lonsdale said that while the current settings were appropriate, he stressed that the environment was fluid and could shift quickly.
“Since APRA’s last update, there has been a shift in the macro-economic outlook,” he said.
“Interest rates have increased over recent months amid elevated inflation. The conflict in the Middle East is impacting economic and financial conditions in Australia, as higher oil prices add to cost pressures for households and businesses.”
Lonsdale also pointed to softening confidence and rising downside risks to growth as reasons for APRA keeping a close watching brief.
“Depending on global developments, these impacts could either ease or become more severe in the period ahead,” Lonsdale said.
Despite those headwinds, he stressed that there were little signs of stress translating into broad‑based credit problems or a pullback in lending.
“Arrears and non-performing loans remain low and there is no evidence that the banking system is restricting credit supply to preserve capital positions in response to greater anticipated credit losses,” he outlined.
[Related: APRA says banks and borrowers can ride out downturn]
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