Slow credit growth increases the pressure on ADIs to compete for business on price and - of concern to APRA - by relaxing lending standards: this can be through increasing risk appetite, relaxing targets and limits, adjusting lending policies and approving more loans as exceptions to these policies. One indicator that APRA monitors closely is the value of new lending at high loan-to-valuation ratios (LVRs). Since 2010, there has been an increase in new lending at LVRs above 90 per cent, particularly in the recent quarter.
A sustained low interest rate environment poses further risks to lending standards. It is important for ADIs to ensure that new borrowers are able to service debt and afford higher repayments when interest rates rise from current record low levels. APRA expects ADIs' serviceability assessments to test borrowers' capacity to meet higher repayments through adequate interest rate buffers and floors, applied to new and existing loan commitments.
(...) Recent international experience indicates that a prolonged period of low interest rates can lead to rising household leverage and housing market pressures, with potential flow-on impacts on the credit quality of housing loan portfolios. This reinforces the importance of ADIs adopting sustainable lending growth targets and prudent lending strategies, including in relation to high LVR lending and loan serviceability standards. APRA is currently developing a Prudential Practice Guide, which will provide guidance to the industry on good practice in housing credit risk management.