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Income-based loan limits could continue to lower home prices

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Additional lending restrictions would further drag home prices down

The crippling housing market condition in Sydney and Melbourne has sent Australian home prices sliding on an annualised basis for the first time in almost six years.

For many industry experts, the recent downtrend in home prices could be explained by the slowing growth of housing credit  – a result of the Australian Prudential Regulation Authority (APRA)'s efforts to financial stability risks.

In 2014, the banking regulator introduced limits on annual investor housing credit growth. Three years after, it instituted a cap on interest-only lending, requiring lenders to limit these loans to about 30% of their total new mortgage loans.

These regulations had a clear-cut effect, easing the housing market even with the historically-low interest rate environment.

This could mean that the planned restrictions on mortgage lending, which will now be based on income and outstanding debt levels, could further impact the housing market, lowering demand and prices.

JP Morgan economists Ben Jarman and Henry St John told the Business Insider Australia that these macroprudential policies are not surprising given the recent revelations of the Banking Royal Commissions about the lending practices of banks.

“We have expected introduction of more stringent lending criteria and tighter assessment of borrowing capacity such as income and expenses. The Royal Commission has highlighted slippage in these areas, and two weeks ago the banking regulator APRA instructed banks to set portfolio limits on new lending in high debt and loan-to-income (DTI and LTI) loans," the two said.

Jarman and St John noted that the high LTI has been an ongoing concern, as it drives the increase in aggregate household debt to 189% of disposable income.

With the expected limits on such loans, the market should expect a significant change, particularly over the medium term.

"While policymakers see an urgent need to stabilize household leverage, the official focus is on limiting risk in new housing exposures, with the regulator showing little appetite to tighten conditions on existing loans. This means that even refinancing, to the extent that it is involuntary is unlikely to be subject to LTI or DTI restrictions," the two economists said.

The two explained that around 10% of new loans had an LTI excess of six times income over the recent years. Based on their calculations, these comprise roughly 31% of the value of new mortgage lending.

"If such loans can no longer occur, this will slow credit growth,” they say, adding that could lead to further property price declines. The restrictions on new high-LTI loans may be the most significant headwind," Jarman and St John said.

They added, "All things being equal, this generally will necessitate some form of concession via lower house prices.”

Related Stories:
APRA to remove growth cap on lending to property investors
Royal Commission: Customers not always ‘treated honestly and fairly’

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