Australian Prudential Regulatory Authority chairman Wayne Byres says the banking regulator was forced to rein in lending to property investors because of "an erosion in standards" in the mortgage market.
Alarmed by soaring household debt and over-leveraged borrowers, APRA has in the past two years capped investor lending growth for major banks at 10 per cent per annum and told the same lenders to limit interest-only loans to 30 per cent of new residential mortgages.
Mr Byres said on Monday that APRA had to act because lenders would not.
"The erosion in standards has been driven, first and foremost, by the competitive instincts of the banking system," Mr Byres told the Customer Owned Banking Convention in Brisbane.
"Many housing lenders have been all too tempted to trade off a marginal level of prudence in favour of a marginal increase in market share.
"That temptation has, unfortunately, been widespread and not limited to a few isolated institutions - the competitive market pushes towards the lowest common denominator."
Mr Byres said the measures were only ever intended to be temporary but that household debt needed to fall before they can be wound back - especially with interest rates expected to rise in the not too distant future.
He said it was up to institutions to show they could be more responsible than in the past.
"For those of you who chafe at the constraint, their removal will require us to be comfortable that the industry's serviceability standards have been sufficiently improved and - crucially - will be sustained," Mr Byres said.
Mr Byres said the industry had strengthened serviceability assessments and reduced high loan-to-valuation lending, but only because APRA had forced it to.
"One might expect a prudent banker to tighten lending standards in the face of higher risk," Mr Byres said.
"But for some years standards had, absent regulatory intervention, been drifting the other way."
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