Modest impact from loan test change: APRA

House prices have risen at their fastest pace in more than 30 years.
House prices have risen at their fastest pace in more than 30 years.

The head of the banking watchdog expects its recent action to curb home lending during a housing boom will have a modest impact.

Earlier this month, the Australian Prudential Regulation Authority increased the minimum interest buffer it expects banks to use when assessing the serviceability of home loan applications.

It wants banks to assess applications at a rate three percentage points above the interest rate product being offered rather than 2.5 percentage points previously.

"It is too early to say precisely what impact this change will have on lending activity, given banks were asked to implement the buffer by the end of this month," APRA chair Wayne Byres said in a prepared statement for a Senate estimates hearing on Thursday.

"The overall impact on aggregate housing credit growth flowing from the change is expected to be fairly modest."

The decision came against the backdrop of house prices rising at their fastest pace in more than 30 years and strong demand for mortgages, with more than one in five new loans approved in the June quarter at more than six times the borrowers' income.

"With lockdowns being lifted, and expectations that the economy will bounce back, APRA considered the balance of risks has shifted such that a timely adjustment to serviceability standards was warranted," Mr Byres said.

Mr Byres again emphasised APRA's action was not seeking to target the level of housing prices.

"Rather, APRA's objective is to ensure that mortgage lending is conducted on a prudent basis, and that borrowers are well equipped to service their debts under a range of scenarios," he said.

The hearing was also told the impact of climate change had had an impact on the insurance sector, but so far there was no evidence of this affecting the pricing of mortgages.

However, Mr Byres said the "risk is there".

He said a large part of the Australian banking system was funded from offshore finance and increasingly investors were giving much greater priorities to considerations of climate risk.

"We have seen an increasing focus on climate and in some extreme cases we've seen investors who say that they are not willing to invest in certain counterparties," he said.

"I would say the risk at this stage is a potential concern, rather than a current concern, but it is a real concern."

Australian Associated Press