Data from the Australian Prudential Regulation Authority (APRA) shows mortgages held by borrowers with debt-to-income (DTI) ratios of more than six increased to 24.4% in the December 2021 quarter.
This was up from 23.8% in the September quarter, and up from 17.3% in the December 2020 quarter.
Borrowings of more than six-times income are generally classified as 'severely unaffordable'.
The proportion of those borrowing more than 90% of the home's value declined, and the number of loans in arrears declined from 1% to 0.8% over the year.
In the December 2021 quarter $171 billion in residential loans were funded, up a third from December 2020.
Money held in offset accounts also reached a record high of $231.7 billion in December, up 4.4% over the quarter, which APRA put down to low interest rates, continuing government support, and reduced consumer spending.
Research from Bluestone shows home loan affordability has declined across all states.
Its affordability index in January climbed to 96.6, up from 93.8 in December
A higher number indicates lower affordability with the index tracking above its long-term average of 87.1.
Home loan affordability declined 16.3% in the 12 months to January 2022.
Bluestone consultant economist Dr Andrew Wilson said this is likely to continue through 2022 albeit at a slower pace.
"Lower prices growth will act to stabilise the decline in underlying home lending activity that has emerged over 2021," Dr Wilson said.
"Continuing low interest rates, the easing of Covid restrictions and concerns, a reviving national economy and the imminent return of mass migration will also support solid home lending through 2022.
"Boomtime house price growth over 2021 and into 2022 has resulted in buyers borrowing more to keep pace with markets and, with subdued incomes growth and flat interest rates, this resulted in a higher proportion of buyer incomes required for loan repayments."
This comes after data from the ABS released yesterday showed the strongest annual property price growth on record, with the median dwelling across Australia's capital cities now costing $920,100 - up more than $200,000 in about 18 months.
Knight Frank's home price index also showed Australia was number one for price performance in 2021, with the index increasing by 17.5%.
Even adjusted for high inflation in other countries, Australia outpaced Turkey (with inflation over 30%), the Czech Republic, and New Zealand.
Running out of puff?
The mortgage market may be running out of steam - CoreLogic's index showed Sydney's property prices declined for the first time in more than 18 months.
Increased APRA lending buffer rates in October were also estimated to affect the average mortgage applicant's borrowing capacity by 5%.
The growth rate of high-DTI home loans is slowing compared to previous quarters.
"The slowdown in the absolute growth of mortgages is notable with growth in the number of loans above six-times DTI also slowing," Westpac's credit strategy team said.
"Since mid-2020, leverage - loans above four-times DTI - has dominated the growth in new loan volumes, and the slowdown may be a sign of APRA’s macro-prudential moves in September beginning to gain traction."
That said, APRA's banking statistics released yesterday showed a higher proportion of loans are excluded from the new policy buffer rate.
Home loans with 'exceptions to serviceability' increased by 50 basis points to 2.4% of new loans funded, while those with 'serviceability verification waivers' increased by 30 basis points to 1.7%.
It was widely tipped APRA would target debt-to-income ratios, which had been climbing through 2021, but ex-RBA economist Peter Tulip explained why this might not have been a good idea.
"At record low interest rates, sensible asset-to-income and hence debt-to-income ratios are much higher than in the past," Mr Tulip told Savings.com.au in September.
Bluestone's Dr Wilson said homebuyers may be at their capacity.
"Strict lending conditions from financial institutions however place a ceiling on borrowing capacity that can sideline buyers and result in reduced demand and lower prices growth," he said.
"Flattening prices growth in the previous high-flying Sydney and Melbourne housing markets reflect significant declines in affordability over the past year, restraining the capacity of buyers to bid up prices.
"Current sales volumes however remain robust with activity supported by strengthening local economies with low unemployment rates, and an easing of covid restrictions and concern."
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