Will This Secret Loan Crackdown Crash Australian Property Again? EP119

The Australian property market had been running hot, and then all of a sudden, it’s like someone poured a bucket of cold water over it. A low-profile government body, which actually holds life-and-death power over the housing market and bank lending, has stepped forward and said: “Australian commercial banks have been pushing residential investment property loans too much. High loan-to-income investment lending is growing quickly, and the overall risk in the mortgage system is rising.” Many people in the industry are reading this as a clear sign that tighter rules on investment property lending might be just around the corner.

And the last time policies around investment loans were tightened, it directly triggered a two-year downturn in the Australian property market from 2016 to 2018. During that period, countless properties plunged in price. A huge number of real estate agents were forced to leave the industry. It also brought an end to speculation on off-the-plan apartments.

We’re going to walk through exactly what this new report says, whether lending policies for investment properties really are going to tighten, when that tightening might begin, and what specific impact the 2016 round of changes had on the market. And then we’ll ask the big question: is that nationwide adjustment in Australian property prices about to happen all over again?

APRA’s Latest Warning

The Australian Prudential Regulation Authority, or APRA, has just released a new report called the “System Risk Outlook”. And the contents of this report have given both the lending industry and the property sector quite a shock.

APRA is a federal government body that oversees banks, insurers and superannuation funds. In simple terms, almost all the money that flows through Australia’s financial system sits under APRA’s supervision. For us in the property and lending space, APRA has the authority to cap how many interest-only loans banks can write, limit the growth rate of investment lending, control the debt-to-income ratios used in loan assessments, and set serviceability buffers for borrowers. Put simply, they can directly control the overall volume of lending in the system, and in turn, influence property prices.

Once you see it that way, you can understand why almost every move APRA makes can directly shape the rise or fall of the housing market. Sometimes, I even feel their actions are more important than the central bank’s interest rate decisions.

This report comes out every six months. There’s a lot you can read between the lines, and it helps me get a sense of where policy might be heading next, so pretty much every time it’s released, I go through it carefully. This time, though, the report is very different from previous editions, and for the property market, the tone is not exactly positive.

APRA confirms that, overall, Australia’s financial system remains safe and stable. But they also make it very clear that they’re now focused on monitoring three key areas of risk: geopolitical risk, cyber risk, and of course, the third area, which is the one we care about the most.

The report points out that the ratio of total household debt to disposable income in Australia is now extremely high. Highly leveraged households are much more likely to default on their debts if the economy turns down, and that can trigger a broader systemic crisis.

At the same time, property prices have been rising faster, especially after the 5% deposit schemes were rolled out. A 5% deposit means leverage can go up to around 20 times. Even though the government is standing behind these loans with mortgage insurance, if a wave of borrowers start defaulting together, the government will have to dip into its reserves to pay out the guarantees, while the people who bought will be left with negative equity. That’s a very dangerous situation.

For other investors, the share of high debt-to-income (high DTI) loans has already started to climb quickly at some banks. As competition between banks heats up, there’s a risk that lending standards get quietly relaxed, which only adds more fuel to the fire.

So what happens if APRA decides that these risks are getting too big? Unlike the Reserve Bank, APRA has a very broad toolkit. Every single tool they pull out is enough to make both the housing market and the banking system feel the pain. Even though they haven’t changed any formal policies yet, APRA has already started doing the groundwork behind the scenes. It’s really only a matter of time before new rules are introduced.

The report states clearly that APRA has recently been in discussions with the banks it regulates, talking through how to tighten residential lending in practice. That includes clamping down on high debt-to-income loans and interest-only loans. The goal is to make sure APRA’s tools can be switched on quickly and have an immediate impact when needed.

And if they really do pull the trigger, the effect will be powerful. How do we know that? Because back in 2016, when APRA stepped in, the market basically got knocked to the ground and didn’t get back up for more than two years. People who went through that period still remember it very clearly — and not in a good way.

The 2016–18 Market Downturn

Let’s wind the clock back to 2013, which was the beginning of the last big wave of off-the-plan apartment speculation in Australia. From the second half of 2013, buyers from overseas started coming into the Australian property market, especially from China. And what were they all targeting? Off-the-plan apartments. How hot were off-the-plan apartments in Sydney and Melbourne back then? Take a building with 300 units for example: at launch, they could sell 280 in a single release. For a 1,000-unit project, they’d split it into four stages. Each stage would launch every two to three months, and with each stage, they’d increase the price per unit by around 10%. Even projects near Macquarie University in Sydney, sitting opposite a waste treatment facility and a cemetery, were selling just as fast. This frenzy gave birth to a full-blown wave of off-the-plan speculation.

Here’s how it worked: A project had four stages. You got in at Stage 1. You paid a 10% deposit and sometimes even earned interest on that deposit. Then you waited until Stage 4 had sold out and construction was about three-quarters complete. At that point, you flipped the contract and sold it on. Just like that, you could pocket 30–40% of the property price without even paying stamp duty, because the property hadn’t officially settled in your name yet.

Back then, there were no foreign stamp duty surcharges, and getting a mortgage as a foreign purchaser was relatively easy. Run the numbers: on a million-dollar unit, you put in 100,000 in cash, and in under two years, you could walk away with 300,000–400,000. That’s an annual cash on cash return of around 150–200%. And many people weren’t just buying one. There were plenty of buyers picking up eight to ten units in one go. With that kind of behaviour, it would have been surprising if the property market hadn’t gone crazy.

By the third quarter of 2014, APRA started to pick up some key warning signs in the housing market. Investment lending was at record highs. The annual growth rate for investor loans had jumped from 2.5% in 2009 to 10% by 2015. APRA’s own description of this was just one word: “crazy”. At the same time, interest-only loans made up 40% of all newly approved mortgages — again, a record high. And loans with LVR above 80% were also surging.

In November that year, APRA ran a stress test on the four major banks. The very act of doing that was already a clear warning signal to the market: APRA was worried and starting to gear up for action. The results showed that if property prices fell sharply, the banks could face mortgage losses of 4.5 billion dollars over five years. If interest rates were to rise at the same time, borrowers’ default risk would spike. But at that stage, the industry still hadn’t really woken up, because everything was still on paper — just reports and analysis, no real policy changes yet.

Then in December, APRA stepped out and started putting real pressure on the market. They did two key things: 1.They capped the annual growth rate of investor lending at 10% for the banks. 2.They tightened serviceability assessments, including reducing the proportion of high LVR loans, and increasing the serviceability buffer used in loan calculations.

These policies began to take effect in the first quarter of 2015. But the property market’s reaction was fairly muted. In the first and second quarters of 2015, investor loan growth remained high. That’s because the banks’ first response was to tighten their internal approval processes rather than use pricing. They lifted their assessment standards and imposed internal lending caps, but they didn’t significantly raise interest rates on investor loans. As a result, property prices just kept marching upwards.

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As they watched property prices keep marching higher, APRA decided this couldn’t go on. In May 2015, they went public and announced they had carried out a “Hypothetical Borrower Exercise” together with the commercial banks. That in itself was an unmistakable signal: APRA clearly believed the existing measures weren’t strong enough and that more needed to be done. This test found that the maximum loan amount the same borrower could get varied by as much as 50% from one bank to another. And straight after that, the real heavy move arrived.

In the third quarter of 2015, the commercial banks all moved at roughly the same time and increased interest rates on investment loans by 0.25%. This was the first time in Australian history that mortgage pricing was differentiated based on the purpose of the loan. Owner-occupier rates stayed the same. Investor loan rates went up. Today, that kind of split pricing feels normal. But at the time, it caused quite a market shock. You could see the share of new investor loans starting to fall from very elevated levels. In other words, fewer people were buying investment properties.

From the moment APRA sent that signal in May to the point in November when the impact began to show up in the market data, the lag was roughly six months.

In September 2015, APRA ran another “Hypothetical Borrower Exercise”, and the results were officially released in March 2016. This time, they found that the maximum borrowing capacity for owner-occupiers had dropped by around 6%, and for investors, it had dropped by around 12%. At some banks, the reduction was as high as 25%. That moment marked a real turning point, when the Australian housing market shifted from strength into a broader slowdown.

Of course, there were other contributing factors as well. For example, stamp duty surcharges on foreign buyers were introduced in 2016, and from that year onwards, the major banks also began tightening lending to overseas borrowers.

Over the following two years, the Australian property market entered an adjustment phase. It wasn’t until April 2018 that the national market really began to loosen up, find a bottom and start to bounce back. APRA withdrew the earlier restrictions, the banks began approving more loans again, and only then did the market gradually stabilise.

So, from APRA’s first warning signal to the point where the housing market was genuinely affected, there was a clear pattern. From the moment APRA started investigating conditions in the financial system, to the release of new policies, and finally to the banks raising interest rates and pushing the property market into a downturn, the whole process took about 18 months. Which brings us to today: with this new round of APRA activity, what kind of impact will it have on the market? And when will we start to see it really cool things down?

APRA’s Next Moves

This latest report from APRA is a very clear signal. They’ve already started talking to the major banks. There aren’t any concrete new policies on the table yet, but you can feel they’re being prepared in the background. The hotter the market runs, the looser the lending becomes, and the stronger APRA’s motivation will be to step in and tighten the rules.

Let’s first talk about the short term – roughly the next 6 to 12 months. Right now, the growth rate of Australian property prices is at its highest level in two years, based on the data from October. At the same time, the share of loans going to investors has hit a record high. The cash rate is sitting at 3.60%, and it’s generally expected that it won’t be cut again before May next year. On top of that, the government’s 5% deposit scheme came into effect on 1 October, bringing more first-home buyers with very little savings into the market.

At the same time, the construction sector is facing a labour shortage of around 200,000 workers, and approvals for new homes are at a ten-year low. APRA states clearly in the report that increasing supply will take time, so the upward pressure on prices is likely to continue in the near term.

Because people can’t afford to buy, we’re already seeing obvious signs that the banks are pushing harder. For example, Great Southern Bank has recently launched a 40-year home loan. AMP has brought out a 10-year interest-only product. And CBA is offering an extra $40,000 in borrowing capacity to some customers while they’re still renting. All of these are signs that the market is encouraging people who don’t really have the money, the repayment capacity, or the ability to absorb risk to jump in and buy. Will APRA move quickly to tighten lending in the short term? No one knows. It depends on how the market evolves.

Looking at the medium term – say, the next 1 to 2 years – APRA has already packed its toolkit and is ready to respond to market changes at any time. That toolkit includes things like caps on high debt-to-income (DTI) loans, limits on investor lending, restrictions on interest-only loans, higher capital requirements for the banks, and tighter LVR limits on how much of a property’s value can be borrowed. Every single one of these measures has the power to hit the market hard. The key question is: what will trigger them?

If we start to see the following, then the likelihood of tighter policies rises sharply: 1 .House prices rising while leverage across the system is also rising. 2.The share of high-risk loans is increasing. 3.A sharp rise in unemployment, early signs of economic trouble, and doubts emerging about borrowers’ ability to keep meeting repayments.

If those conditions show up, we could very well see a repeat of the pattern we saw in 2016. Once new policies are in place, my guess – in a more optimistic scenario – is that price growth might slow to around 3–5% per year. In a more pessimistic scenario, prices might correct by 5–10%. Of course, these are just my own estimates. No one really knows exactly how things will unfold.

In this APRA report, there was one line that actually made me breathe a little easier, because it suggests the chance of immediate policy changes is relatively low.

The report says that around May 2026, APRA will release another report outlining the results of the second phase of its stress testing. In other words, APRA is still in monitoring mode. What happens after that new report, whether they start tightening at that point or not, is hard to say. But at least for now, they’re not pulling the trigger. And even if they do start tightening later on, it will still take time for the market to feel the full impact.

This whole timeline lines up with what I said in my early-August monthly livestream about how I expected this housing cycle to play out. Back then, my view was that the national Australian property market could have a reasonable chance of entering an adjustment phase after the third quarter of 2026.

At the same time, different cities will move on different timelines. There will be misalignment in the property cycles between cities, which means there will still be investment opportunities.

For now, property investors don’t need to be overly worried. If you enter the market at this stage, there’s still a good chance of getting some capital growth in the short term, giving your investment property a margin of safety. And if the market slows down later, that’s not something to be afraid of.

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