SYDNEY, Oct. 6 (Reuters) – Australia’s banking regulator on Wednesday tightened restrictions on mortgage lending and signaled possible additional measures, saying the rapid growth in lending that has fueled soaring house prices poses a risk for financial stability.

The Australian Prudential Regulation Authority (APRA) estimated that its higher benchmark for assessing the ability of homebuyers to repay loans would reduce a typical borrower’s maximum borrowing capacity by about 5%.

But since less than one in 10 borrowers apply for the maximum loan, the vast majority of borrowers will not be affected by the change, analysts say.

Home prices, already 20% higher than last year even with coronavirus lockdown measures in major cities, are therefore unlikely to be brought under control and analysts expect new measures to be introduced.

“The increase in the share of heavily indebted borrowers and indebtedness in the household sector in general means that medium-term risks to financial stability are mounting,” said APRA President Wayne Byres, in a press release.

The regulator expects growth in home loans to outpace that in household income, with more than a fifth of new loans approved in the June quarter already representing more than 6 times the borrower’s income.

In a letter to lenders, APRA said they should assess the ability of new borrowers to repay their loans at an interest rate at least 3 percentage points higher than the rate on the loan product, up from 2, 5 percentage points currently.

He also called on banks to rethink their risk appetite for lending with high debt / income levels, saying if these loans continued to grow they would consider a new macroprudential intervention.

APRA has said it will showcase other capital and credit tools it could use in the coming months, with some analysts expecting further increases in the cushion.

“We therefore take today’s announcement as a clear signal of intent … and any evidence that investor lending is adding to the strong price growth we are currently seeing will likely be firmly in the crosshairs. APRA, “said Brendon Cooper, head of credit strategy at Lender Westpac.

In the past, the regulator has applied restrictions on investor loans and interest-only loans.

Bank stocks were mixed after the announcement, with the Commonwealth Bank of Australia (CBA.AX), the largest lender, losing 2.3%, while shares of its three largest peers were down around 1% .

APRA said banks that continue to approve loans using the lower 2.5% buffer after October will have their capital requirements increased to reflect higher credit risk.

Reporting by Wayne Cole and Paulina Duran; Editing by Richard Pullin and Christopher Cushing

Our standards: Thomson Reuters Trust Principles.

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