"We believe that effectively a third phase of macroprudential policy – resulting in a (further) tightening of lending standards – is now just underway, with the key implication of a potentially material negative impact on housing and the economy yet to be seen," they wrote.

"Given how quickly this evolved, there is a growing risk the consensus view on the outlook (including the RBA) is under-estimating the downside risk from tightening lending standards, which is an important consideration to balance against the upside from household tax cuts and booming global growth."

A dramatic fall in interest-only loans followed the previous rounds of macroprudential tightening. The decline represents around $70 billion in loans as borrowers switch faster than expected into principal-and-interest loans, on UBS estimates

"This faster than anticipated switching means that not only has macro-pru had a larger impact on credit growth and house prices than expected but also on the real economy as borrowers are faced with higher repayments," the UBS economists wrote.

Switching will accelerate as more of the current crop of interest-only loans mature. By 2020 around $160 billion of such loans will either mature into principal-and-interest or require refinancing.

By then though, the borrowers are likely to face tighter lending conditions.

Already a broader shift in focus toward loan serviceability and responsible lending is gathering steam.


APRA's chair Mr Byres has flagged his concerns on the benchmarks that banks use to assess borrowers' expenditure needs.

Last week, The Australian Financial Review revealed that a record $5 billion worth of mortgages sold in the December quarter of 2017 fell outside APRA's minimum loan serviceability buffers.

That surge comes as the major banks launch a rate-slashing war as they redouble their efforts to claim market share and bigger profits in tougher real estate markets.

The bank regulator will also be intensifying its focus on banks' knowledge of their borrowers' overall obligations, according to UBS.

That capacity will be given a boost from July this year with the introduction of mandatory comprehensive credit reporting, which will allow lenders to see all outstanding debts of the customer.

At the same time, the heightened scrutiny of mortgage brokers and their incentives, mostly recently by banking royal commission in the past week, could also prompt further regulation.

"All this suggests that APRA is now less concerned with financial sector stability than they are with financial stability for individual borrowers and households and that they are not yet done with macroprudential policy," the UBS economists wrote.