The Australian Prudential Regulation Authority has tightened its bank lending rules in an effort to constrain the rise in higher-risk lending practices.

APRA said that in an environment of "high housing prices, high and rising household indebtedness, subdued household income growth, historically low interest rates, and strong competitive pressures" it was appropriate to introduce new measures to mitigate risk. 

APRA will restrict interest-only loans to 30 per cent of total new residential mortgage lending. Within that limit there will be tight restrictions on interest only loans with a loan-to-value ratio of more than 80 per cent, and "strong scrutiny and justification" will be required for interest only loans with an LVR of higher than 90 per cent.

Growth in lending to investors will remain at the previously advised benchmark of 10 per cent.

APRA Chairman Wayne Byres said the 10 per cent benchmark for growth in lending to investors provides an appropriate constraint in the current environment.

But he said additional measures are required, particularly in relation to the high levels of interest-only lending currently being seen in the market.

"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," he said.

Malcolm Gunning, president of the Real Estate Institute of New South Wales, told SCHWARTZWILLIAMS the measures should only be applied in the booming Sydney and Melbourne markets, and not in other markets around the country that are struggling.

"It is important to recognize that Australia’s housing market is not homogeneous," he said. 

The measures are "aimed at the Sydney and Melbourne markets. It is important that they not be applied in areas where building activity is providing much needed economic stimulation and employment," he said.

Gunning encouraged banks to apply the measures "so as not to adversely affect struggling housing markets."

The Housing Industry Association welcomed the new measures, saying they "provide a cautious and sensible approach to the home lending environment".

The measures "focus on maintaining a steady growth in investor lending with a particular emphasis on managing interest-only loans,” said Dr Harley Dale, chief economist of the HIA.

Dale said the new regulations allow for variations across the market.

“The measures allow the ADI banks to assess loan applications across a broad and varied landscape,” he said.

“Australia’s housing market is not homogeneous," said Dale.

“The banks are well positioned to apply these additional measures... so as not to adversely affect struggling housing markets,” concluded Dale.

Ken Morrison, Chief Executive of the Property Council of Australia, said they will take a "wait and see" approach before making a conclusive decision on the changes.

"Boom and busts benefit no-one," he said, "so it is best to be prudent without being unnecessarily risk-adverse."

But he warned of reducing the supply of new dwellings.

“Housing approvals have fallen by 17 per cent from their peak over the past eight months," adding, "we are seeing consistent strong demand in our largest cities.

Morrison said The Property Council will "remain in dialogue with regulators on any unintended consequences.”

Read the letter APRA sent to the ADIs here.

See also:

Tougher home lending not the answer for WA: REIWA, UDIA WA

Other lenders fill the gap as big four clamp down on foreign borrowers

Seven property lessons from 2016 to take into 2017