Despite louder calls for the Australian Prudential Regulation Authority (APRA) to loosen lending curbs amid declining home prices, industry experts think it is more likely that the opposite will happen.

Digital Finance Analytics principal Martin North said more tightening in the form of a rate rise or macroprudential policy would have to happen to contain the risks in the system.

"Some of this will come from the lenders directly. For example, last week ANZ said it will be regarding all interest-only loan renewals as a credit critical event requiring full income verification from March 5," North said, adding that if loans failed this assessment, they would be reverted to principal and interest loans with higher repayment terms.

Also Read: ANZ heightens scrutiny of customers switching to interest-only

He added: "We are already seeing a number of forced switches, or forced sales thanks to the tighter IO rules more generally. This is just the start. More than $60 billion of IO loans are outside current underwriting standards on our estimates."

However, North said household leverage is still improving despite the ease in housing credit growth over the past year. Additionally, household debt continues to accelerate faster than disposable income.

In a note, ANZ head of Australian economics David Plank explained that with this instance, it would require the growth in household debt to slow well below that of income in order for the ratio of household debt to income to stabilise.

The economist raised concern about the "misplaced" confidence of the Reserve Bank of Australia (RBA) with how things are evolving on the debt front

"A key concern we have with the RBA’s comfort with recent household debt trends is whether the slowdown in household debt growth is likely to be sustained with interest rates so low," Plank said.

He added: "If things develop in this fashion it will be interesting to see whether the RBA maintains its focus on clear progress toward the mid-point of the inflation target range as the key to the setting of interest rates."

For North, it would be likely for more tightening rules to take effect before the interest rates go up.

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