(Bloomberg) -- Australia's banking regulator has further tightened lending restrictions amid concern runaway home-price growth may stoke a housing bubble.
Under the new curbs, home lenders will have to restrict interest-only loans to 30 percent of total new residential mortgages, the Australian Prudential Regulation Authority said in a statement Friday.
Interest-only loans, which are favored by borrowers taking advantage of tax-breaks on property investments, account for almost 40 percent of residential mortgages, which APRA said is “quite high” by international and historic standards.
Regulators have grown increasingly concerned about the risks posed by high and rapidly rising home prices in Sydney, Melbourne and Brisbane, which have fueled record levels of household debt. Central bank Assistant Governor Michele Bullock recently said regulators are “prepared to do more if needed” and Australian Securities & Investments Commission Chairman Greg Medcraft said he believes the housing market is “bubbly.”
As part of the latest restrictions, lenders will also have to place “strict” limits on the number of interest only-loans of more than 80 percent of a property's value, and ensure “strong scrutiny and justification” of any interest-only loans of more than 90 percent of a home's value, APRA said.
Investor Loans
The loan-to-valuation restrictions will “work to slow the flow of investor credit growth, given that the tax system provides incentives for investment properties to be highly geared,” RBC fixed income strategist Michael Turner said in a note. In Australia, interest expenses on investor loans are tax deductible, but not interest expenses on owner-occupier loans.
The regulator said growth in interest-only lending is “indicative of a higher risk profile” and it will consider imposing “additional requirements” on lenders who exceed the 30 percent limit.
APRA also reiterated the need for banks to keep annual investor-lending growth below its previously advised limit of 10 percent.
Commonwealth Bank of Australia, Westpac Banking Corp., and Australia & New Zealand Banking Group Ltd. have this month all raised rates on interest-only investor loans to help ensure they stay below the cap.
Home values in Sydney rose at the fastest pace in 14 years last month, surging 18.4 percent from a year earlier, according to data provider CoreLogic Inc. Preliminary data suggests annual growth in Sydney accelerated this month, it said Thursday.
“The debate around housing affordability and overheated housing values is about to step up a notch,” CoreLogic head of research Tim Lawless said in an emailed statement.
To contact the reporters on this story: Peter Vercoe in Sydney at pvercoe@bloomberg.net, Emily Cadman in Sydney at ecadman2@bloomberg.net.
To contact the editors responsible for this story: Edward Johnson at ejohnson28@bloomberg.net, Peter Vercoe
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