The banking regulator has capped interest-only mortgage lending and is prepared to take more action to address growing price and debt risks in the Australian housing market.
The Australian Prudential Regulation Authority has told lenders to limit higher risk interest-only loans to 30 per cent of new residential mortgages against a backdrop of high housing prices, high and rising household debt, subdued household income growth, and historically low interest rates.
Fears that APRA would slash its cap on investor lending growth by as much as half did not materialise as the limit was held at 10 per cent per annum, but the regulator said it would change settings or implement further measures if necessary.
"Our objective with these new measures is to ensure lenders are recognising the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions," APRA chairman Wayne Byres said in a statement.
"APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile."
Mr Byres said interest-only loans currently constitute nearly 40 per cent of residential mortgage lending in Australia, which was high by both international and historical standards.
APRA said lenders must also place strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80 per cent, and ensure strong scrutiny and justification of interest-only LVRs above 90 per cent.
It did not say what those limits or serviceability criteria should be but said it would impose additional requirements on any lender that exceeded the 30 per cent cap.
RBC strategist Michael Turner said the measures were softer than expected as the limit on interest-only loans was not significantly below current shares and there was no hard cap on high-LVR lending.
"Relative to the earlier measures, we doubt that the impact will be as large, although it is still reasonable to expect some slowing in investor activity through 2017," he said.
JP Morgan strategist Sally M Auld said it would be three to six months before any effect would be seen.
Commonwealth Bank, Westpac, ANZ and National Australia Bank have all lifted mortgage rates over the past fortnight following a hike by the US Federal Reserve, with interest-only and investor loans particularly targeted.
Some lenders have stopped refinancing investor loans from competitors to head off additional capital requirements they would expect to incur were they to breach the 10 per cent annual limit on investor loan growth.
Housing Industry Association chief economist Harley Dale said APRA's new measures gave lenders flexibility in a market where prices were rising in Sydney and Melbourne but falling in Perth.
Any move by the Reserve Bank to lift the cash rate from its record low of 1.5 per cent would risk denting already fragile property markets, he said.
"Australia's housing market is not homogeneous," Dr Dale said.
"The banks are well positioned to apply these additional measures and do so with a considered and targeted approach so as not to adversely affect struggling housing markets."