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Bank watchdog cracks down on property speculation

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Banks told to wind back interest-only loans, which are favoured by investors. Photo: Getty
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One of Australia’s bank regulators has announced a new crackdown on mortgage lending, amid fears speculators are squeezing out first home buyers by driving up prices to unaffordable levels.

The Australian Prudential Regulation Authority (APRA) said on Friday that mortgage lenders must limit interest-only loans, which are “higher risk”, to 30 per cent of new residential mortgages, down from the current 40 per cent.

Banks will also be expected to “place strict internal limits” on interest-only loans with deposits less than 20 per cent, and where they do allow deposits of 10 per cent or less they must “ensure there is strong scrutiny and justification”.

While these measures will affect home buyers and investors alike, they are most probably aimed at investors, who tend to account for a higher share of interest-only loans. This is because investors can claim tax deductions for interest expenses, while owner-occupiers cannot.

In the final quarter of 2016, 35 per cent of the stock of residential mortgages (including refinancing) were for investors, and 40 per cent were interest-only, according to APRA’s latest figures.

The main aim of the new speed limit on interest-only loans is to preserve the “resilience of lenders”, which means APRA wants to protect against a US-style crash.

“Our objective with these new measures is to ensure lenders are recognising the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions,” APRA chairman Wayne Byres said in a statement.

“APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile.”

The regulator did not specify what “internal limits” the banks should put on low-deposit, interest-only loans.

“However, APRA considers it important that borrowers retain some level of financial buffer to allow for unexpected events, especially for borrowers that have high levels of indebtedness,” Mr Byres said.

These new measures will be in addition to the 10 per cent annual cap on investor loan growth that APRA imposed in December 2014, which cooled the market only temporarily.

While the 10 per cent speed limit will remain in place, APRA has instructed lenders to stay “comfortably … below” this figure, which may be an indirect way of lowering the cap.

Many fear that house price growth in several of the capital cities is being fuelled by investors, who rent back properties to families who might otherwise have afforded to buy.

CoreLogic, a prominent property analysis firm, estimated this week that house prices in Australia’s capital cities have already risen by 3.7 per cent since the start of 2017, with Sydney leading the charge at 5.3 per cent.

Earlier this year, five Australian cities were named in the 20 least affordable for housing, with Sydney ranked second behind Hong Kong, by research firm Demographia.

Even before APRA’s announcement, the Australian banks had already begun tightening up interest-only lending, with a particular focus on forcing investors to pay a premium.

In recent days, Commonwealth Bank raised its interest-only rate for investors by 26 basis points to 5.94 per cent per year, and for owner-occupiers by 25 basis points to 5.47 per cent.

ANZ raised its interest-only investor rate by 11 basis points to 5.96 per cent, and its owner-occupier rate by 20 basis points to 5.25 per cent.

Westpac increased its interest-only investor rate by 28 basis points to 5.96 per cent, and its owner-occupier rate by 8 basis points to 5.49 per cent.

And NAB also increased its interest-only investor rate by 25 basis points to 5.90 per cent, and its owner-occupier rate by 7 basis points to 5.42 per cent.

There are also moves afoot by the Basel Committee on Bank Supervision, a global regulator, to include higher risk weightings on interest-only home loans in the upcoming Basel IV accord.

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