Australia's banking regulator announced on Monday that it will maintain a 3% serviceability buffer for home loan lending, citing high household debt, ongoing cost-of-living pressures, increasing credit growth, and a softening job market.
The Australian Prudential Regulation Authority (APRA) noted that while inflation has been easing and the likelihood of further interest rate hikes has diminished, a slowing labour market could still pose risks of “shocks to household incomes.”
“High household debt is a key vulnerability if adverse economic scenarios came to pass. We also have seen an uptick in non-performing loans, with the potential for further rises, especially if unemployment increases,” according to APRA Chair John Lonsdale in a statement.
In addition, Lonsdale noted that the risk of financial shocks has remained over the past year, though the sources of economic uncertainty have shifted, necessitating the retention of the current macroprudential policy settings.
“Since APRA’s last announcement regarding its macroprudential policy settings in July, inflation has continued to moderate and the risk of higher interest rates has receded somewhat, but we are mindful of potential shocks to household incomes from a slowing labour market,” he said.
“That risk is exacerbated by uncertainty in the global economic environment including geopolitical instability.”
According to home loan guidelines, major lenders in the country must evaluate new borrowers’ capacity to meet loan repayments at an interest rate at least 3 percentage points higher than the current home loan rate, Reuters news agency reports.
Moreover, Australia’s employment growth decelerated in October following a strong period, though the jobless rate remained low and underlying trends appeared stable, indicating limited urgency to reduce interest rates.
APRA also stated that the countercyclical capital buffer would be maintained at 1.0% of risk-weighted assets, ensuring banks have an extra capital reserve to handle potential stress scenarios.