Australian banks given the green light to increase lending - link to SMH article.

Due to a change in rules brought in by the banking industry watchdog in Australia, banks can ease an important test they apply on new loan applications.

Basically, previously, part of a home loan risk assessment was to check if a borrower could afford to meet their payments if interest rates rise significantly. The change drops the margin tested dramatically. This will give borrowers access to a bigger loan.

I see this as a very risky move. Australias property market has eased after years of booming prices. This move is likely to increase debt levels, and adds significant risk to the economy. While interest rates are at historically low levels, history shows that things can change quickly.

Lots of people are borrowing huge amounts to get into the property market. All it takes is an economic shock to the system, and people currently paying 3-4% could be paying much more, with falling property prices leading to a negative equity position.

I see this move as very risky for the Australian economy, and I'm glad I don't have any shares in the big Aussie banks. I can still remember the days of 17-18% interest rates. Can the banks and regulatory bodies?

Thanks for reading and have a great day.

John.

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