The buyers who could be impacted by a crackdown on high-debt home loans

First-home buyers struggling to keep up with rapidly rising property prices could be caught out by tougher lending restrictions being considered to clamp down on housing market risks, experts say.

Homeowners looking to upsize and investors with multiple properties could also take a hit to their borrowing power, as regulators consider measures to curb how much debt buyers are taking on.

With more than one in five homebuyers borrowing more than six times their income, regulators have been given the green light to clamp down on high debt-to-income-ratio loans by treasurer Josh Frydenberg, and have confirmed that macroprudential measures are being considered.

A tightening of lending restrictions was arguably overdue, said AMP Capital chief economist Shane Oliver, with housing credit now growing faster than incomes and at a faster monthly pace than when the Australian Prudential Regulation Authority (APRA) last started macroprudential controls in 2014. About 22 per cent of new loans went to borrowers with debt-to-income ratios above six times in the June quarter, up from 14 per cent two years ago.

However any rollout of macroprudential controls – a “fancy” term for measures to restrict the flow of credit – would be different to previous curbs introduced to limit investor lending and interest-only loans in 2014 and 2017, Dr Oliver said, as this was now less of a concern.

“[Still] investors will be caught up [by measures to limit high debt-to-income ratios] because sometimes they are big borrowers [who] tend not to be so focussed on paying down the principal [of a loan], and some investors may have multiple properties with higher debt-to-income ratios,” he said.

“It also runs the risk of impacting first home borrowers … and owner-occupiers trading up by taking advantage of lower rates to borrow more; they may both find they may be restricted in terms of what they can borrow.”

Controls could involve putting a limit on how much money people could borrow, at say six times their income, or limits on the proportion of new lending with higher debt-to-income or loan-to-value ratios, Dr Oliver said.

He suspected moves to limit high ratios would largely target investors, and be designed to have limited impact on first-home buyers, as was the case in New Zealand, where the Reserve Bank was recently given powers to limit high debt-to-income ratios.

Another option would be to increase the interest rate buffer used to assess people’s ability to repay loans if rates rise from their record lows – which have helped to fuel buyer demand, subsequently pushing prices higher.

Limiting borrowing to less than six times incomes would put Sydney’s median house price out of reach for the average family in NSW and the unit median out of reach for singles, even if they had a 20 per cent deposit, modelling by RateCity.com.au shows.

In Melbourne, median house and unit prices would also be out of reach for those with a 10 per cent deposit.

Gareth Aird, head of Australian Economics at Commonwealth Bank, said an increase in the interest rate serviceability assessment rate would be preferable to a cap on the debt-to-income ratio and would be a “cleaner” way to reduce the level of debt people were taking on. That’s what the CBA chose to do in June, when it raised its home loan interest rate buffer to 5.25 per cent, from 5.1 per cent.

“In the main what it will mean is that the average buyer is going to be offered a little bit less money … and if everyone is offered a little less it’s going to have a cooling impact on prices,” he said.

There is a risk that a cap on the debt-to-income ratio could further reduce first-home buyer activity, Mr Aird said, as younger buyers were more willing to take on higher levels of debt to get into the market, as they expected to see their incomes rise as their career progressed.

Meanwhile, investors could have an advantage as rental returns would be factored in as income when their borrowing capacity was determined.

Independent economist Saul Eslake said first-home buyers could be disproportionately impacted by limits to loan-to-value and debt-to-income ratios, as they generally needed to borrow more given the difficulty of scraping together a deposit in a rapidly rising market.

Macroprudential measures should have been contemplated earlier, Mr Eslake said. While they were less likely to target investors this time, it would be regrettable if the APRA did not revisit previous restrictions on such lending, given that the number of investors buying had taken over the number of first-home buyers in recent months.

Better still, he said, he would like to see governments act on recommendations made by both the International Monetary Fund and the Organisation for Economic Co-operation and Development to reduce tax benefits for investors to take the heat out of the market – along with other measures including tightening lending restrictions.

“It’s regrettable that macroprudential measures may have a bigger impact on first-home buyers than others, when really first-home buyers are the ones that need the help, but if the government is not prepared to wind back tax breaks to investors … then what else can you do,” he said, adding it would be a mistake for the Reserve Bank to lift interest rates now to try to cool the market.