The decision on whether to intervene in a red hot housing market lies with our regulators. The problem is, they don’t have the right data to make the call.

Property prices are surging in 2021, as pent-up demand fuelled by record low rates ignites the market. Like buyers and sellers, regulators are keenly watching the market, but it’s not prices they’re worried about, it’s lending standards.

So far the regulators don’t have concerns. In their review of the December numbers, the Australian Prudential Regulation Authority concluded there had so far been no material relaxation in lending standards.

Regulators are yet to express concern about lending standards. Picture: Getty

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But the available indicators are flawed, and regulators must work with lenders to provide better ones.

Regulators, including APRA and the Reserve Bank of Australia, consider many indicators when assessing the riskiness of lending. Key metrics that have raised flags recently include high debt-to-income (DTI) ratio lending and high loan-to-valuation ratio (LVR) lending.

Debt-to-income ratios are a poor measure of risk

Regulators track loans extended at high DTI ratios – the amount borrowed relative to a borrower’s income.

Borrowers with high DTIs have higher repayments relative to their income, which may make them more likely to experience difficulty making repayments.

APRA data, released this month, showed the share of lending at DTI ratios of six or more (six times the borrower’s annual income) increased to 17% of new lending in the December 2020 quarter. This is the highest level recorded since data collection began in May 2019.https://flo.uri.sh/visualisation/5646977/embed?auto=1