What Australia's New High Debt Lending Cap Means for the Property Market

Australia’s banking regulator has moved to rein in the riskiest edge of mortgage lending, announcing new limits designed to protect financial stability rather than slow the property market itself.

The Australian Prudential Regulation Authority will cap the share of new loans written at a debt-to-income ratio above six at 20 per cent of total lending. In practice, this restricts how much banks can lend to borrowers taking on mortgages worth more than six times their annual income.

The measure will take effect in February and comes as housing affordability deteriorates to record lows and investor activity surges.

Moxin Reza from Investor Partner Group said the move should be read as a warning signal, not a brake on prices.

“This is about managing tail risk in the system,” he said. “It’s not designed to change buyer behaviour across the market, and it won’t meaningfully affect demand in the short term.”

Treasurer Jim Chalmers said the restrictions would strengthen financial resilience and assist with affordability, though he acknowledged the regulator’s role was limited.

Affordability pressures have intensified as borrowing costs remain high and prices continue to rise. Recent data shows a typical household now needs to commit close to half of its pre tax income to service a new mortgage.

Investor lending has been a particular focus. Investors now account for around 40 per cent of new loans, with the value of investor lending jumping 18 per cent in the September quarter alone.

Reza said that concentration matters more than headline lending growth.

“When investors dominate new lending, risk becomes more correlated,” he said. “You get more leverage tied to the same assumptions about price growth and rental demand.”

Apra chair John Lonsdale said the regulator was prepared to go further if conditions worsened, including imposing investor specific limits.

It has been more than a decade since Apra last stepped in to restrain lending growth. That intervention had a material impact on prices. Analysts do not expect the same outcome this time.

“This is a guardrail for stability, not a handbrake on demand,” said Nicola Powell, Domain’s chief of research and economics. “It reins in the riskiest lending but doesn’t touch the bulk of the market.”

Apra data supports that view. Only about 10 per cent of new investor loans and 4 per cent of owner occupier loans currently exceed a six times income threshold, well below the new cap.

Jon Mott, banking analyst at Barrenjoey, said the policy was unlikely to be binding in the near term.

“It signals awareness of elevated household leverage,” he said. “But it doesn’t materially constrain lending under current conditions.”

Reza agreed, noting that most buyers already sit outside the targeted risk band.

“For many households, serviceability limits, deposit requirements and property prices are the binding constraints,” he said. “This rule mostly affects highly leveraged borrowers at the margin.”

Cotality head of research Eliza Owen said the change was timely given investor activity had returned to levels last seen during the 2010s apartment boom.

“It’s a preventative measure,” she said. “It’s aimed at stopping a blowout in high debt to income lending rather than reversing current trends.”

She added that affordability challenges ultimately sit outside the regulator’s remit.

“Structural issues like tax settings and supply constraints are what move the dial on prices,” Owen said.

Greens senator Barbara Pocock said the move did not go far enough, arguing investors continued to crowd out first home buyers.

Reza said further intervention remained possible but would need to be carefully calibrated.

“If lending standards genuinely deteriorate, Apra has room to tighten further,” he said. “But if prices keep rising, that will be driven more by supply shortages and population growth than by this slice of lending.”

The new cap underscores a broader reality of the current cycle. Regulators are focused on containing financial risk, not correcting housing affordability. For buyers and sellers, the market’s direction will continue to be shaped less by credit rules and more by how much housing is available, and where.