• Owner-occupier loans now larger component of mortgage demand
  • APRA's moves have already led to improved lending criteria

The Australian banking regulator will continue to focus on strengthening mortgage lending standards amid signs of a slowdown in the property market.

The regulator’s crackdown last year has seen a shift in home loans from landlords to owner-occupiers, who now account for a greater share of new lending, Wayne Byres, chairman of the Australian Prudential Regulation Authority, told a parliamentary hearing Friday. While APRA’s moves have improved lenders’ assessment of a borrower’s ability to repay, there was more work to be done, he said.

“Our supervisory work on lending standards for housing will continue in 2016,” Byres said. “Importantly from our perspective, serviceability assessment standards have improved across the industry, although we still have further work to do to ensure improved lending policies are fully implemented, monitored and enforced.”

Australia’s house prices, particularly in Sydney and Melbourne, and high household debt levels have become a headache for regulators. Mortgages account for about two-thirds of the loan books of the nation’s largest banks, forcing the regulator to increase supervision and introduce in new rules to protect the financial system from a housing downturn.

APRA urged banks in December 2014 to limit their annual growth in investor mortgages to 10 percent. From July this year, lenders will need to hold more capital against mortgages and the regulator asked them to change the way they assess borrowers’ capacity and ability to repay the loans.

In anticipation of the deadline, the four-largest lenders -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. -- embarked on a record A$20 billion ($15 billion) capital-raising in 2015 and raised mortgage rates for the first time in five years.

Median home prices in Sydney, which touched a record high of A$800,000 in October, dropped 4.6 percent in February, the most since at least 1990, according to data from CoreLogic Inc. Dwelling values will decline 2.6 percent by the end of the third quarter from the October peak, CoreLogic-Moody’s Analytics Australian Forecast Home Value Index revealed last month. It showed that homes are 5.9 percent overvalued across the country.

With lenders’ loan books skewed toward home loans, there was “little room” to get policy and supervision wrong, Byres said.

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