The move by the banking regulator, the Australian Prudential Regulation Authority, to fire a shot across the bows of home lenders to curb riskier practices has two important ramifications. Firstly, it will slow down the growth in residential property prices, and secondly, it should provide the Reserve Bank with the freedom to lower interest rates in the new year.

For first-time homebuyers with the funds and sufficient confidence in their job prospects it may well provide a far better opportunity to get a foothold in the market.

But those borrowing for investment in residential property or who are seeking to borrow a very high proportion of the value of the property could find it tougher to access finance.

APRA’s move is part of what the industry calls the “macro-prudential” response to hot spots in the property market fuelled by a significant growth in riskier lending by banks.

It’s an issue that has been worrying all regulators that have some oversight over this market and its participants. Regulators in countries such as New Zealand and the UK have already moved on property speculators. Australia’s response to taking the heat out of the property sector  may have been a bit slower but appears to be comprehensive. Fear that this sector of the property market would further overheat is also one of the reasons the RBA has been loath to cut interest rates.

The prolonged low interest environment has encouraged property speculation and housing bubbles to emerge in particular parts of the Sydney and Melbourne market.  APRA’s action is designed to have it deflate rather than burst.

Fear that this sector of the property market would further overheat is also one of the reasons the RBA has been loathe to cut interest rates. Over the past month an increasing number of economists have been forecasting rate cuts next year based on recent economic data including weaker-than-expected gross domestic product growth figures last week and consumer sentiment reading on Wednesday from the Westpac-Melbourne Institute that showed an alarming fall of 5.7 per cent.

In a letter to the banks on Tuesday night, APRA noted “strong competition in the housing market is also evident, which is accentuating pressure on lending standards”.

“Against this backdrop, housing credit growth has accelerated, with lending to property investors particularly strong; the Reserve Bank of Australia has noted that this could be funding additional speculative activity in the market. These forces have contributed to strong house-price growth, particularly when viewed against the more subdued growth in household incomes,” it said.

This bank wing-clipping exercise may not have a major or immediate impact on the big banks because the regulator is concerned about growth in investment housing loans above 10 per cent.

At this point, only  National Australia Bank is growing this part of its loan book at more than 10 per cent – albeit not much higher. Analysts appear to take the view that most banks – certainly the majors – will be comfortable with their existing loan portfolios.  But some note that Macquarie Bank has been growing at a rate of over 50 per cent in the mortgage market. Thus, it could draw more attention.

The bigger issue is that this segment of the loan market is performing particularly well and not being able to grow it beyond 10 per cent – without some ramifications – could curb the bank profit growth.

The APRA decision is only one part of a pincer that will place additional restraints on the banking industry. The other is the Financial Services Inquiry recommendations, which push for banks to reduce their risk profiles by holding more capital relative to the amount they lend.

The banks will  fight the recommendations from FSI  but at this stage the government – which has the final say – is showing every sign it will support the call to make the banks more fail-safe.

The Australian Securities and Investments Commission  has also chimed into the lending debate, saying it would be focusing more attention on mortgage lending.

“ASIC will conduct a surveillance into the provision of interest-only loans as part of a broader review by regulators into home-lending standards,” it said.

The review follows concerns by regulators about higher-risk lending, following strong house price growth in Sydney and Melbourne.

There was a certain inevitability about what appears to be a concerted response to the home-lending property bubble. It has been on their agenda for about a year.  But  over the past few months it has become clear that the growth in property prices is starting to abate. The regulatory cavalry is possibly arriving a little late.