Australia’s financial regulators have launched a joint attack on risky home lending as investment and interest-only loans threaten the stability of the financial system.

The Australian Prudential Regulation Authority called an emergency meeting with the nation’s banks to tell them of new speed limits that will prevent them from aggressively pursuing investment property borrowers.

At the same time, the Australian Securities and Investment Commission said it would investigate interest-only loans, which make borrowers highly sensitive to movements in interest rates.

The move could put the brakes on the rampant property markets in Sydney and Melbourne, which have seen house prices rise at a double-digit pace fuelled in part by demand for investment loans.

The investigation will probe the banks, including the big four, as well as non-bank lenders and their behaviour as the property market heats up, the Australian Securities and Investments Commission said.

“The review follows concerns by regulators about higher-risk lending, following strong house price growth in Sydney and Melbourne,” it said.

ASIC, the Australian Prudential Regulation Authority, the Reserve Bank of Australia and the Treasury were working together on the investigation, which will “monitor, assess and respond to risks in the housing market”, ASIC said.

They will co-ordinate their investigation through the Council of Financial Regulators.

ASIC said on Friday that interest-only loans as a percentage of new housing loan approvals by banks had reached a new high of 42.5 per cent in the September quarter.

This included owner-occupied and investment loans.

“While house prices have been experiencing growth in many parts of Australia, it remains critical that lenders are not putting consumers into unsuitable loans that could see them end up with unsustainable levels of debt,” ASIC deputy chairman Peter Kell said.

“Compliance with responsible lending laws is a key focus for ASIC. If our review identifies lenders’ conduct has fallen short, we will take appropriate enforcement action.”

In a separate statement, APRA revealed it had written to all of the banks, asking them to set out plans to reinforce sound residential mortgage lending practices.

“In the context of historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating credit growth, APRA has indicated it will be further increasing the level of supervisory oversight on mortgage lending in the period ahead,” it said.

It said it was not yet necessary to introduce across-the-board increases in capital requirements, or caps on particular types of loans.

“These steps represent a dialling up in the intensity of APRA’s supervision,” APRA chairman Wayne Byres said.

“There are other steps open to APRA, should risks intensify or lending standards weaken and, in conjunction with other members of the Council of Financial Regulators, we will continue to keep these under active review.”

The banking regulator flagged last month it was mulling action to stop the housing market from overheating, voicing particular concerns about the jump in the number of owner-occupiers taking out interest-only loans.

Steven M??????????????? 1/4 nchenberg, chief executive of the Australian Bankers’ Association, which represents the big four banks, said: “Lending into housing markets has been a regulatory focus for some time and we are confident that banks have been maintaining appropriate lending standards.”

A spokesman for the National Australia Bank said it would “work co-operatively with the regulators to ensure ongoing prudent lending practices”.

“NAB has a well-defined approach to our risk settings and regularly engage in a range of stress tests that examine the portfolio against a number of economic scenarios, including declines in the property market, rising unemployment or changes in interest rates.

“NAB assesses every customer on a case-by-case basis and looks at a range of factors such as their ability to manage debt, today and into the future, before providing loan approval.”

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Posted by Georgia Wilkins and Nassim Khadem – The Age on 10th December, 2014