March 30, 2017 / 10:27 PM / 4 months ago

UPDATE 2-Australia steps up battle against housing speculators, not done yet

4 Min Read

* APRA limits new interest-only lending to 30 pct vs 40 earlier

* Banks to limit investor lending to "comfortably below" 10 pct

* More steps needed to combat housing mania - analysts

* Quality of bank lending "high" - ABA (Adds details, background)

By Wayne Cole and Swati Pandey

SYDNEY, March 31 (Reuters) - Australia's banking watchdog on Friday launched a new salvo in its battle against speculative home lending and explosive house prices, though analysts were far from convinced the war was yet won.

The Australian Prudential Regulatory Authority (APRA) asked banks to limit new interest-only lending to 30 percent of total new residential mortgage lending, from 40 percent now. It also demanded that banks limit investor credit to "comfortably remain below" a previously-set cap of 10 percent annual growth.

The measures come as regulators grow increasingly worried about a run-up in borrowing at a time when household debt is already at record highs and could weigh on consumer spending power - risking a damaging pullback in home prices.

But industry players say more stringent measures are needed to cool the red-hot market.

"This is not a hard change to the target as had been mooted recently in the press (with) some suggesting the 10 percent limit could be as much as halved," said Bill Evans, chief economist at Westpac Banking Corp.

Westpac is Australia's No.2 mortgage lender after Commonwealth Bank.

"Looking ahead, the Reserve Bank of Australia's (RBA) Stability Review on April 13 may provide more clarity on the macro prudential policy outlook and potential triggers for further action," Evans noted.

Behind-the-scenes pressure from the regulators has already prompted the major banks to lift borrowing costs on a range of home loans for investors, and even owner-occupiers.

"Another potential area would be to lower that investor lending growth rate. Ten percent is still a fairly high clip," said Phil Miall, head of credit research and strategy at Brisbane-based QIC, which has A$74 billion of assets under management.

"If they want to get more aggressive they could look at risk weights...and that would force banks to hold more capital against those particular loan types."

Home prices have surged in Sydney and Melbourne in recent months, with annual growth reaching almost 20 percent in Sydney according to property consultant CoreLogic.

Mortgage lending is a staple for Australia's "Big Four" banks which depend on home loans for 40-60 percent of their revenue.

The Australian Bankers' Association said the quality of bank lending was high. Borrowing with loan-to-value ratio (LVR) of 90 percent or more was at record low levels while the proportion of new interest-only home loans had "declined significantly" over the past two years, it said.

Interest-only loans were singled out for special attention because they are favoured by speculators for their tax advantages.

"APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile," APRA Chair Wayne Byres said in Friday's statement.

The watchdog said it might impose added restrictions on banks should the proportion of new interest-only mortgages exceed 30 percent of total new home-loan lending.

Analysts noted APRA's latest steps were not as bold as in New Zealand where regulators slapped strict LVR limits on banks in an attempt to cool prices in the largest city of Auckland.

"Overall, we see the measures as erring to the softer end of expectations," said Michael Turner, a fixed income strategist at RBC Capital Markets.

"Relative to the earlier measures, we doubt that the impact will be as large, although it is still reasonable to expect some slowing in investor activity through 2017 given declining rental yields, increasing mortgaging rates, and oncoming supply." (Additional reporting by Jamie Freed and Cecile Lefort; Editing by Eric Meijer)

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