Scrutiny mounts as easing of mortgage activity ramps up competition for new customers
Australia's banking regulator is watching for signs that lenders are loosening lending standards to win borrowers, as a weakening housing market sharpens competition between banks and non-bank lenders.
The warning sits in the new System Risk Outlook for November 2026 from the Australian Prudential Regulation Authority (APRA), which noted that riskier lending remains contained, but that it and the other Council of Financial Regulators (CFR) agencies are monitoring whether strong competition in a slowing market is weakening standards.
The regulator also made clear that its limits on high debt-to-income (DTI) lending, in force since February 2026, will stay in place as a safeguard against a renewed build-up of riskier loans.
Higher interest rates, tax changes and softer sentiment have cut housing demand. National prices have fallen about 8% across the capital since March 2026, back to around mid-2025 levels, and housing credit growth has slowed, particularly for investors.
Forward indicators point to further easing in housing and mortgage activity. With fewer new loans to go round, APRA worries that lenders are competing strongly for borrowers, both among the banks and with non-bank lenders.
Household buffers are holding, for now
The regulator reckons most borrowers can ride out the downturn. Many have built up sizeable mortgage prepayments and home equity in recent years. APRA cited Reserve Bank of Australia (RBA) estimates that fewer than 2% of variable-rate owner-occupiers face a cash flow shortfall, and fewer than 1% of all borrowers are in negative equity, where the loan exceeds the home's value.
Arrears have risen but remain low, although mortgage arrears are set to keep climbing, bank chiefs have warned.
The vulnerability is debt. Household debt sits at around 180% of disposable income, high by historical and international standards. APRA warned this could amplify a more severe downturn, particularly if a sharper fall in prices coincided with a substantial rise in unemployment. That scenario looks less remote as the major banks deepen their forecasts, with CBA bracing for a record Australian housing market downturn.
Banks pass APRA's toughest stress test yet
The banking system itself looks sturdy. Preliminary results from the 2026 Trans-Tasman Stress Test, run with the Reserve Bank of New Zealand (RBNZ), found the five largest Australian banks would remain resilient under a deep recession, an oil price shock and a cyber-attack. APRA called it the most severe bank stress scenario it has run, and said banks kept lending throughout. Detailed findings are due later this year.
APRA chair John Lonsdale said banks, insurers and superannuation trustees would need financial strength, operational readiness and crisis preparedness to stay resilient.
“Australia’s financial system remains resilient, but the risk environment is becoming less forgiving,” Lonsdale said.
He pointed to an unpredictable global backdrop, where weak points in financial markets and critical infrastructure could magnify future shocks. Rapid advances in AI were supporting economic activity, he said, but also speeding up cyber and operational threats and deepening reliance on a small number of material service providers. “Our financial system is well placed to withstand this turbulent period. Financial buffers and robust operations provide a strong foundation for system resilience.”
Lonsdale said recent stress testing, including APRA’s first System Risk Stress Test, showed the system could absorb significant market and liquidity stress. “But institutions and regulators also need practical capabilities to manage crises that combine financial and operational pressures.”
Under its latest corporate plan, APRA will stay focused on making sure regulated institutions are ready for financial and operational shocks, including crises where several pressures emerge at once, he said.
