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Australia regulator calls on banks to curb investor mortgage growth

[SYDNEY] Australia's prudential regulator on Tuesday asked banks to limit loans to investors to 10 per cent a year in what it said were targeted steps to address risks in a frothy housing market.

Banks should add a 2 per cent interest rate buffer on mortgage and have an interest rate floor of 7 per cent while assessing borrowers' ability to repay their loans, the Australian Prudential Regulation Authority (APRA) said in a statement.

APRA will be paying "particular attention" to higher risk mortgage lending and lending to property investors, suggesting that authorities were keen to preempt the threat of a housing bubble.

However, there are no plans to introduce across the board increases in capital requirements or caps on particular types of loans, it said. "This is a measured and targeted response to emerging pressures in the housing market," APRA Chairman Wayne Byres said in the statement.

In the first quarter of 2015, APRA will review banks'lending practices and may take "supervisory actions" including raising capital levels for the erring lender, it said. "These steps represent a dialling up in the intensity of APRA's supervision, proportionate to the current level of risk and targeted at specific higher risk lending practices in individual (banks)," Byres said.

In September, the Reserve Bank of Australia said it was considering tougher rules on lending for housing investment given rapid loan growth and rising home prices.

The central bank fears that too much speculation will increase the risk of a sharp correction in housing prices which could ripple through the economy.

Lending to investors has jumped this year to its highest since comparable records started in 1991, accounting for about half of Australia's residential loans in value terms. Investor interest has also helped push housing prices in Sydney and Melbourne to the point where most first-time home buyers are widely seen as priced out of the market.

Last month, a stress tests showed that a severe housing market collapse could ravage Australian banks earnings and capital levels.