APRA announced the buffer would remain at 3%, requiring lenders to assess borrowers' ability to repay their home loans as if interest rates were 3% higher than their offered rate. 

The buffer aims to protect against volatility in Australia's financial system by ensuring borrowers can repay their loans even if interest rates were to rise.

APRA chair John Lonsdale said that, while house price growth has eased, prices remain 40% higher than pre-pandemic levels and household debt-to-income ratios are still above long-term trends and international levels.

"This high household debt is a key vulnerability if adverse economic scenarios came to pass," Mr Lonsdale said.

"We also have seen an uptick in non-performing loans, with the potential for further rises, especially if unemployment increases."

NAB calls for serviceability buffer to be lowered

However, the likes of NAB have recently called for the watchdog to lower the buffer, particularly for first time buyers.

"In the current economic environment where the combination of higher interest rates, inflation, and house prices have created greater challenges to enter the housing market, a lower serviceability buffer for first home buyers would provide them a modest amount of additional support to help enter the market," NAB stated in a submission to a Senate inquiry into financial regulatory frameworks and home ownership.

It said the lowest rate at which it can currently assess a first home buyer's ability to meet mortgage repayments is 9.04% p.a. (6.04% p.a. plus the 3% p.a. buffer).

For an average first home buyer loan – around $540,000 – the difference between 6.04% p.a. and 9.04% p.a. translates to over $1,100 more per month in repayments.

It's not just NAB calling for changes to the serviceability buffer.

Earlier this year, ANZ CEO Shayna Elliott said prudential regulation was locking some out of the property market, while James Austin, CFO of non-bank lender Firstmac, told the Savings Tip Jar podcast a 2% buffer is more realistic in August.

"I don't think anyone would seriously think there's going to be 300 basis points of increases from here," Mr Austin said.

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The Reserve Bank of Australia (RBA) cash rate – a major influence on home loan interest rates – remained at its 13-year high of 4.35% in November, with most experts not expecting cuts till next year.

Though, not all industry participants agree that APRA should lower the buffer.

Westpac doesn't believe the buffer isn't a "major inhibitor to home ownership" and CommBank noted it plays an important role in ensuring homeowners don't find themselves overindebted.

NAB pushes for HECS reform and higher income caps

NAB also called for the government to lift income caps for first time buyers turning to the Home Guarantee Scheme (currently $125,000 for individuals and $200,000 for couples) and to change the way banks can treat student debt.

Right now, banks must treat HECS-HELP debt as a liability, thereby limiting borrowing capacity.

NAB estimated that removing HECS-HELP debt from assessments and lowering the buffer to 2.5% could increase borrowing capacity by $116,000 for a first time buyer earning $125,000 annually with average expenses and a $5,000 credit card limit.

The changes could see the theoretical buyer able to borrow around $613,000 – up from their current approximate borrowing capacity of $497,000.

Serviceability testing debate arises amid housing affordability pressures

While the serviceability buffer plays a part in housing affordability, the challenges facing homebuyers are largely born from other factors.

"The big issue for Australia is housing values outpacing wages growth, because that not only makes mortgage serviceability difficult in the high interest rate environment, but it makes it hard to accumulate the deposit for a mortgage in the first place," CoreLogic head of residential research Eliza Owen told Your Mortgage.

A recent report from ANZ and CoreLogic revealed housing unaffordability is at its lowest level in decades.

For a household earning the median income and purchasing a median-priced property with a typical mortgage and a 20% deposit, more than half of their income is now required to cover home loan repayments.

Even higher-income households aren't immune to the affordability crisis.

For households in the top income quartile, 50% of the nation's housing stock remains unaffordable if they aim to keep mortgage repayments under 30% of their earnings.

Meanwhile, those earning a median income can afford just 10% of properties while retaining at least 70% of their income.

For households in the 25th income percentile, that figure drops to 0%, effectively locking them out of the market unless they risk mortgage stress.

And affordability could actually worsen if APRA were to reduce the serviceability buffer, Ms Owens said, as homebuyers may borrow greater sums to pay more for property, thereby driving prices higher.

Good news for hopeful homebuyers

Fortunately, the future appears to be brighter for first time buyers.

"In the next six months, you could continue to see an improvement in affordability for cities like Hobart, Melbourne, and Canberra, where values have been fairly flat or falling," Ms Owens said.

"Even Sydney appears to potentially be entering a small cyclical decline because of affordability constraints.

"But ultimately, there's not going to be any big structural changes to housing affordability at the national level."

Additionally, the RBA looks likely to reduce the cash rate in 2025.

This could help struggling mortgage holders but may simultaneously increase house prices.

In the meantime, homebuyers are adjusting to the current environment.

"There're a couple of data points that may indicate how borrowers are adapting," Ms Owen said.

"One of those is a relatively strong rate of growth in the low-value segment of the Australian market – if you consider the bottom 25% of home values across the capital cities, in the past three months the bottom 20%-25% of capital city home values increased 2.1%, compared to a point 1% decline in the high end of the market.

"That could suggest buyers are increasingly demanding cheaper properties because they've only got a limited amount of finance to work with.

"Another data point that was of interest from last week during Christopher Kent's RBA speech, was a figure he presented on median deposit sizes – they're also getting larger, which could help reduce the debt burden for home buyers."

"Of course, not everyone can fork out a higher deposit, and that's part of the issue with equity in housing market purchases."

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