This week, APRA proposed adjusting its 7 per cent interest rate test for home loan applications. This means applicants wouldn’t have to prove that they can repay a loan on an interest rate as high as 7 per cent.

In response, ratings agency Moody’s said this move would likely stimulate growth quicker than expected in the mortgages market.

“The proposal is likely to increase borrowing capacity, with some banks reporting that the interest rate floor has been a key contributor to the decline in borrowing capacity in recent years,” Moody’s said.

“Improving access to credit will support credit growth for the banks, which has declined significantly from its peak in 2014 and, in turn, stem the fall in house prices,” it said.

“Falling house prices are dampening household consumption and contributing to a weaker growth outlook for Australia,” it said.

While there’s merits to a flux of buying and lending activity, there’s also risk of “excessive” credit growth, Moody’s said.

“Despite declining house prices, high household leverage remains a key risk to Australian banks,” Moody’s noted.

“[There] is a risk that the lowering of the interest rate floor, in combination with the potential for the Reserve Bank of Australia to lower the cash rate later this year, could drive a resurgence in excessive credit growth and another house-price boom.”

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