Australia’s struggling housing market has been given a shot in the arm after regulators indicated that banks could relax their mortgage lending requirements and the Reserve Bank hinted that a cut in interest rates was looking more likely.

Shares in banks rose sharply after the Australian Prudential Regulation Authority proposed on Tuesday that banks should change the way they assess customers’ ability to meet their mortgage repayments in a move that would let people borrow more.

After big rises in banking stocks on Monday following the Coalition’s election victory, the optimistic mood gained more momentum when minutes from the RBA’s last board meeting revealed that board members said a reduction in the cash rate “would likely be appropriate” in coming months if the labour market did not improve.

The RBA held the cash rate at its record low of 1.5% this month but the minutes of the May meeting released on Tuesday show board members explicitly acknowledged the likelihood of a cut if unemployment did not fall.

The bank’s governor, Philip Lowe, further prepared the way for a cut in a speech in Brisbane on Tuesday afternoon in which he said that the board “will consider the case for lower interest rates” at its next meeting on 4 June. All four major banks now forecast the RBA will cut rates from the current 1.5% at that meeting.

Official data earlier this month showed the unemployment rate rose 0.1 percentage points in April to a worse than expected 5.2%.

The ASX200 benchmark share index closed up 24 points, or 0.37%, to 6,500.1 points with financial stocks leading the way. Westpac was the highest riser again on 2.7%, following on from its 8% leap on Monday.

But the Australian dollar ticked 0.55% lower against its US counterpart on the release of the minutes and was worth US68.73c after the close of Australian trading.

U/E has now risen from 4.9% to 5.2% & spare capacity also picked up if the RBA wanted to cut in June, it could justify that move. Leading indicators continue to deteriorate: ANZ job ads, NAB biz survey employment index, capacity utilisation, SEEK job ads contracted in April https://t.co/cMJ1qbexdw — Eleanor Creagh (@Eleanor_Creagh) May 21, 2019

RBA is set to deliver the September 2018 interest rate cut in June 2019 #RBAfail — Stephen Koukoulas (@TheKouk) May 21, 2019

The two developments were seen as potential game-changers for the housing market, which has been crippled by much tighter credit standards hitting investors in particular, stagnant wages and the withdrawal of overseas buyers.

Frank Mirenzi, senior credit officer at Moody’s Investors Service, said Apra’s decision would help support credit growth and could stem the fall in house prices.

“The proposal will likely increase borrowing capacity and potentially allow households to increase leverage,” he said on Tuesday. “However, banks have progressively tightened mortgage underwriting practices over a number of years, which mitigates the risks of a resurgence in excessive credit growth and another house price boom.”

At the moment, Apra’s guidance says that customers should be able to repay their loan if their interest rate increased to at least 7%. But Apra suggested recommending lenders instead make serviceability calculations using a 2.5% rate buffer.

A Rate City analysis shows a family on an average household income of $109,688 would be able to borrow up to around $60,000 more if their loan was assessed at 6.25 per cent instead of 7.25%. The average single person would be able to borrow up to around $50,000 more under the same scenario.

RateCity.com.au research director Sally Tindall said the change could be more effective than an RBA rate cut for new borrowers.

“This is going to be a game changer for a lot of potential buyers who can’t quite get their home loan application across the line.”

The Apra chairman, Wayne Byers, said historically and persistently low interest rates had left the 7.0% mark unnecessarily high, while the gap between owner-occupier and investor rates meant a single rate was no longer as appropriate.

“The changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards,” Byers said in a statement.

“Rather, it is simply recognition that the current interest rate environment does not warrant a uniform mandated interest rate floor of 7.0% across all products.”