Banking giant Westpac has stopped lending to foreign property buyers in a surprise move that is likely to spark concerns about a slowdown in residential construction, particularly in capital city apartments.

Australia's apartment construction boom is being underpinned by a wave of foreign buyers, with many borrowing from local banks to fund part of their home purchase.

Westpac said Wednesday that it, and subsidiaries St George, Bank SA and Bank of Melbourne, would immediately halt all home lending to non-residents and temporary visa holders.

Westpac will stop lending to foreign property buyers. Photo: Nicholas Rider

The bank, one of Australia's big four and the country's second largest bank, said it was also tightening lending standards on Australian citizens and permanent visa holders whose main source of income was from overseas, reducing the maximum amount it will lend them for property to 70 per cent of the purchase price.

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Other banks move

Westpac's tightening of standards follows the Commonwealth Bank's clamp down on home loans to foreigners and temporary residents not earning an income in Australia.

Australia's apartment construction boom is being partly driven by a wave of foreign buyers.

A month ago, the ANZ also reviewed its lending to offshore investors and temporary residents.

Urban Development Institute of Australia chief executive (Victoria) Danni Addison said the shift would crimp the number of buyers leading to some apartment projects struggling to get enough pre-sales.

"If undersupply results from an increase in the number of projects that are unable to commence, we will see dwelling prices increase and availability decrease, not only for foreign investors but for Australians as well," Ms Addison said.

Apartments hardest hit

Mark Steinert, chief executive of Australia's largest diversified developer Stockland, said tighter standards were part of an incremental shift prompted by the Australian Prudential Regulatory Authority's 10 per cent cap on growth in bank lending to investors.

The impact was likely to be felt more by apartment developers which had a larger "investor participation in that segment of the market," Mr Steinert said.

"We sell less than four per cent to overseas investors," he said. Tightening standards on foreigners would probably make it easier for owner occupiers to get a loan, he said.