Aussie housing crisis: COVID-era borrowing rules blamed for barring first home-buyers from loans

Pandemic-era borrowing restrictions are locking out first home-buyers and limiting Australia’s housing supply, home builders say, with mortgage arrears actually falling in the face of three interest rate hikes.

Next month marks the fifth anniversary of the Australian Prudential Regulation Authority announcing that banks and other lenders would be required to model a prospective lender’s ability to cope with a three-percentage point increase in variable mortgage rates.

This restriction remains in place in Australia more than four years after the Bank of England removed an identical rule for UK home lenders.

The Housing Industry Association’s chief economist Tim Reardon said Australia’s outdated stress test was making it harder for first homebuyers to enter the market and called for an independent review of the banking regulator’s rules.

“It reduces competition and it increases the cost of borrowing to first home-buyers which is part of the reason we’ve seen the Federal Government intervene with the five per cent deposit scheme,” he told The Nightly.

Removing that stress test would also make it easier to get a construction loan, he argued.

“With enough time, increased access to finance increases the supply of new homes,” Mr Reardon said.

“It is not, in itself, a solution to the affordability challenge but it is a component to increasing housing supply.”

Australian mortgage delinquencies, where a borrower is 30 days or more behind on their repayments, fell to 1.41 per cent in May 2026, down from 1.45 per cent in May 2025, new data from credit ratings agency Moody’s released on Thursday showed.

Arrears rates only rose in 38 out of 89 regions, even though the Reserve Bank raised interest rates in February, March and May, taking the cash rate to 4.35 per cent.

Victoria had the highest mortgage delinquency rate of 1.76 per cent in May but this marked a sharp drop from 1.89 per cent in May 2025.

Melbourne’s Mornington Peninsula, however, had a much higher delinquency rate of 2.2 per cent, up from 2 per cent.

Tasmania had the second-highest arrears level of 1.73 per cent, down from 1.94 per cent.

The Northern Territory had the third-highest delinquency rate of 1.5 per cent, but this marked a sharp fall from 2.53 per cent a year earlier.

In Queensland, the proportion of borrowers behind on their mortgage repayments fell to 1.12 per cent from 1.17 per cent with inner Brisbane having the nation’s lowest arrears rate of 0.69 per cent, down from 0.88 per cent.

In the rest of Australia, delinquencies were little changed, increasing marginally in NSW to 1.36 per cent, up from 1.35 per cent.

But the Shoalhaven and Southern Highlands region of the State had Australia’s highest arrears rate of 2.77 per cent, which was almost double the national average, up from 2.41 per cent.

Outer south-west Sydney also had a particularly high delinquency rate of 2.15 per cent, up from 2.03 per cent.

In South Australia, arrears rose to 1.3 per cent from 1.26 per cent and in Western Australia edged up to 1.29 per cent from 1.28 per cent.

The ACT continued to have the lowest arrears rate of 1.1 per cent which was unchanged.

APRA in October 2021 announced the stress test would be increased from 2.5 percentage points to 3 percentage points, back when the Reserve Bank cash rate was at a record low of 0.1 per cent.

At the time, the banking regulator was more concerned about an oversupply of apartments, but with immigration levels soaring after the pandemic to record-high levels, Australia now suffers from a housing shortage.