Is ‘ultra-cheap’ funding on its way out?
A second big four bank has gone and hiked its fixed home loan rates for owner-occupiers. ...
First home buyers and investors have both been pegged as the biggest losers of APRA’s recent lending announcement – here’s what could play out in the coming months.
On Wednesday, 6 October, the Australian Prudential Regulation Authority (APRA) announced to lenders that it would expect authorised deposit-taking institutions to assess a new borrower’s ability to meet their loan repayments at an interest rate that is at least 3 per cent above the loan product rate – a 0.5 per cent increase on the previous buffer, or at the floor rate of 5.09 per cent, whichever is higher.
Prior to the APRA announcement, there had been a whirlwind of commentary that lending restrictions would become tighter in response to continually rising property prices and the increasing disconnect with affordability, prompting The Adviser editor Annie Kane to question whether lending should be limited to six times a borrower’s income.
Since APRA’s decision was made public, a number of groups have weighed in on the decision, discussing how the increased buffer could impact potential property purchasers.
Speaking to REB on the issue, CoreLogic head of research Eliza Owen called APRA’s action a “subtle approach” to improving financial stability, which “will likely only impact at the margins of borrowing demand”.
From her perspective, it’s investors that could bear the biggest burden based on APRA’s move. This is because many owner-occupier mortgage rates are lower than investor rates, and because – as noted by APRA – investors “tend to be more leveraged in their borrowing behaviour and may be carrying additional housing debt, which would also be subject to the increased serviceability assessment”.
First home buyers
But according to the Housing Industry Association (HIA), it will be first home buyers who bear the brunt of the changed borrowing condition.
HIA chief economist Tim Reardon has expressed that the goal of home ownership for renters will become even tougher to attain based on the new buffer.
“Over 90 per cent of renters aspire to own their own home, but less than half of them expect that they will ever achieve this goal,” he stated.
“First home buyers are the group who are typically constrained by serviceability thresholds. It is this group that will be hit hardest by these changes.”
He argues that restricting access to credit for new households seeking to enter the housing market would put further downward pressure on the rate of home ownership in Australia.
Mr Reardon said that financial regulations that have been put in place since 2010 have made it “progressively more difficult for first home buyers to enter the market” and pointed out Australia’s “unquestionably strong financial sector” and “low levels of mortgage delinquency” as reasons APRA should not have increased the serviceability buffer.
Where to from here?
The Property Council of Australia (PCA) relayed to the public that it understands the rationale behind APRA’s decision to increase interest buffers on home loan applications.
But, it has requested potential impacts be monitored into the new year before any further action to further tighten lending be considered.
Property Council chief executive Ken Morrison expressed it as “vital” that the measures “do not sap broader market confidence during our economic recovery”.
“This move comes when fiscal stimulus and the HomeBuilder effect are withdrawing from the economy, the successful transition out of lockdown of our two largest states has yet to occur, and net overseas migration is still negative.”
He commented: “Strong housing construction has underpinned Australia’s economic resilience through the pandemic and supports more jobs per dollar spent than any other industry, and this should never be taken for granted.”
That reasoning is why Mr Morrison has urged the government and the regulator “to keep a patient focus on the impacts of these changes until the new year and to target their communications accordingly”.
With more changes potentially on the horizon, Ms Owen also flagged it as “worth noting that this may not be the end of macro-prudential changes”.
She cited comments made by APRA’s chair Wayne Byres in his letter to lenders, in which he said APRA “would consider the need for further macro-prudential measures” if new mortgage lending on high debt-to-income ratios remains at high levels.
“Therefore, while the announcement may seem like a subtle change to housing lending conditions, there may be more tightening to come as the Council of Financial Regulators monitors trends in housing credit and household debt.”
Real estate is a type of real property that refers to any land and its permanent improvement or structures that come with it, whether natural or man-made.