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Australia's banking regulator has decided to maintain the serviceability buffer at 3% for home loan lending amid growing concerns over high household debt, persistent cost-of-living pressures, and looming job scarcity.

Despite fears of potential inflation or higher interest rates eroding, Australian Prudential Regulation Authority (APRA) was concerned about the slowing labor market's impact on household incomes. The regulator said in a statement it was confident the 3% buffer will help households stay afloat and repay their loans under various scenarios.

APRA uses macroprudential policies to protect the entire financial system from potential risks, with the proactive approach helping prevent widespread financial instability.

To make informed decisions, APRA carefully considers various factors, including household debt, rising credit growth, cost-of-living pressures, job market weakness, and global geopolitical risks.

APRA also verified the countercyclical capital buffer will remain at 1% of risk-weighted assets, and all restrictions on capital distributions or lending limits were scrapped.

"Since APRA's last announcement regarding its macroprudential policy settings in July, inflation has continued to moderate and the risk of higher interest rates has receded somewhat, but we are mindful of potential shocks to household incomes from a slowing labour market. That risk is exacerbated by uncertainty in the global economic environment including geopolitical instability," said APRA Chair John Lonsdale.

"Credit continues to flow to households and businesses and is accessible to good quality borrowers. Although house price growth has eased, prices are still 40% higher than before the pandemic and household debt is high relative to incomes both compared with long-term trends and relative to international peers. This high household debt is a key vulnerability if adverse economic scenarios came to pass. We also have seen an uptick in non-performing loans, with the potential for further rises, especially if unemployment increases."

Major lenders in the country were required to evaluate new borrowers' capacity to repay their loans based on an interest rate at least 3 percentage points higher than the current home loan rate. Even though employment growth slowed in October, Australia's job market was still doing well, with low unemployment, indicating that interest rate cuts were not urgently needed, Reuters reported.