SYDNEY (Reuters), Australia’s banking regulator has tightened restrictions for home lending. Rapid loan growth caused surging prices, and posed a danger to financial stability.

Australian Prudential (NYSE 🙂 Regulation Authority (APRA) has increased the minimum interest rate buffer banks are expected to use in evaluating the serviceability and eligibility of home loan application.

APRA told lenders that they expect to evaluate new borrowers’ abilities to repay their loans with an interest rate at least 3.0 percentage point above the loan product. This is in contrast to the 2.5 percent buffer.

“APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” APRA Chair Wayne Byres said in the statement.

Australia’s housing prices rose sharply in 2018 despite record low interest rates. The central bank has been reluctant to hike the cash rate to 0.1% from 2024 to help ease debt.

More than half of all new loans in the June quarter were more than six times the income of the borrower. The regulator noted that housing credit growth should outpace the growth in household income.

Byres explained that “the economy is likely to rebound as lockdowns around the country are lifted, and the balance of risk is such that higher serviceability standards seem warranted.”

Because some borrowers may be already limited by lenders’ floor rates and because many borrowers don’t borrow to their full potential, this will have a minimal impact on overall housing credit growth.

A letter was sent to banks by the regulator asking for a review of their risk appetite in lending high amounts at debt-to-income ratios. The regulator warned that it could consider macroprudential intervention if this continued.