Property Australia

APRA’s interest rate buffer boost

Karen Jamal Karen Jamal October 12, 2021

Could APRA’s decision to raise interest rate buffers on home loan applications influence the bedrock of Australian investment?


  Three key takeaways:

  • Last week, APRA, the Australian Prudential Regulation Authority, increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.
  • From November, banks must test new borrowers’ ability to meet their loan repayments if interest rates rose at least 3.0 percentage points above the current rate, compared with 2.5 percentage points today.
  • Property Council policy boss Mike Zorbas says the rationale is reasonable but given previous experiences, the regulator must precisely target the risk on the edges of the market and avoid impacting broader confidence in the construction of new homes.


APRA says the primary reason for this decision is an increase in the share of heavily indebted borrowers. Announcing the policy change, APRA chair Wayne Byers said “more than one in five new loans approved in the June quarter were at more than six times the borrowers’ income”.

Byers also noted that the banking system is “well capitalised and lending standards overall have held up”.

Mike Zorbas understands the “prudent rationale” for APRA’s decision to adjust home loan eligibility tests, which will reduce the maximum borrowing capacity for the typical borrower by about five per cent.

“We note it will be vital for the government and the regulator to monitor the situation closely into 2022, to ensure their efforts do not sap broader market confidence during our economic recovery,” Zorbas says.

Zorbas says housing “represents the bedrock asset of the majority of Australian families”.

Australia’s residential housing market just surpassed a new record of $9.1 trillion, just five months after reaching $8 trillion in value, according to CoreLogic.

“This puts housing values around 28.2 per cent higher than the estimated value of superannuation, the ASX and commercial real estate combined,” explains CoreLogic’s head of research, Eliza Owen. Average national house values reached $719,209 in September, and units now sit at $586,993.

Zorbas is mindful the move comes as fiscal stimulus and “the HomeBuilder halo” are fading from the economy, as transition out of lockdowns are yet to occur in Sydney and Melbourne, and as net overseas migration is “still negative”.

“Strong housing construction has underpinned Australia’s economic resilience through the pandemic and supports more jobs per dollar spent than any other industry and this should never be taken for granted.” The National Housing Finance and Investment Corporation, for instance, has found every $1 million of residential building construction industry output supports nine jobs.

Andrew Whitson, Stockland’s chief executive of communities, told The Australian last week that the buffer was a “reasonable measure” but “housing supply remains a significant lever impacting the availability and affordability of housing”.

“New housing stock is more affordable for first home buyers and drives economic growth for our nation,” Whitson says.

The Housing Industry Association is also concerned about the impact first home buyers. HIA chief economist Tim Reardon has said that more than 90 per cent of renters aspire to own their own home “but less than half of them expect that they will ever achieve this goal”.

“First home buyers accounted for 35 per cent of owner occupier loans issued in August and these measures will make it harder to access a loan,” Reardon says.

The Property Council urges the federal government and regulator to “keep a patient focus on the impacts of these changes until the new year and to target their communications accordingly,” Zorbas concludes.