CANBERRA, AAP – Treasurer Josh Frydenberg believes the decision by the banking watchdog to tightening lending rules for buyers is prudent, coming at a time of low interest rates and following a dramatic rise in house prices.

The Australian Prudential Regulation Authority has told the banks it wants them to assess new borrowers’ ability to meet their loan repayments at an interest rate at least three percentage points above the loan product rate they are applying for.

This compares with the serviceability buffer of 2.5 percentage points that has been commonly used.

“We think it’s prudent, we think it’s targeted,” Mr Frydenberg told the Nine Network on Thursday.

“What they are seeking to do here is to prevent risk emerging in the housing market.”

APRA’s decision came against the backdrop of the fastest rise in house prices in more than 30 years and strong demand for mortgages with interest rates at historic lows.

Shadow treasurer Jim Chalmers said housing affordability is a major issue for Australians.

“Labor supports the regulators doing what they can to ensure the flow of finance for housing is more sustainable and appropriate,” he told AAP.

St George chief economist Besa Deda described it as a “light touch” to temper housing risks.

“We expect the pace of growth in house prices to slow further but we are unlikely to see price falls materialise in the near term from (these) measures alone,” she said.

However, Housing Industry Group chief economist Tim Reardon questioned the decision, saying Australia has a strong financial sector.

“It has withstood significant shocks, such as the Global Financial Crisis and the COVID recession, without the emergence of financial contagion,” he said.

“Restricting access to credit for new households seeking to enter the housing market will put further downward pressure on the rate of home ownership in Australia.”

Property Council of Australia chief executive Ken Morrison also said while he understood the rationale for APRA’s move, he believes its impacts should be monitored into the new year before any further action is considered.

“It will be vital for the government and the regulator to monitor the situation closely into 2022, to ensure their efforts do not sap broader market confidence during our economic recovery,” Mr Morrison said.