Fresh from Deep T, MB’s big time banking insider:
You have no idea of the smugness of the whole mortgage industry. Brokers won and its back to normal pumping debt. Banks and funders will now pump up the amount of debt on serviceability to unsuspecting borrowers. Not solutions just can kicking to a worse disaster. BUT:
- APRA is not ASIC, and there’s still some hope that some sense will prevail through the case against Westpac. ASIC actions may still trigger huge class actions against the banks and internal management liability.
- Whilst house prices may rise, mathematically its hard to imagine how they could go much above previous highs without wage inflation even with RBA cuts. Watch BBSW blow out again as the cuts eventuate.
- The external position is no better and getting worse. That $1 Trillion debt will come home to roost at some point and China is getting closer and closer to triggering that disaster or at least triggering interest rate rises from capital flight pressure.
- Whilst the FHB mortgage guarantee will bring forward demand, millennials and most immigrants don’t have any money to drive prices.
Then again, as per Scumo, do you believe in miracles?
Versus Chris Joye:
One rider is APRA’s important announcement today that it is going to remove the minimum 7% serviceability interest rate banks are required to apply when lending to borrowers. We predicted this would happen on April 29 (see here), and APRA has gone even further than we expected: removing the 7% rate altogether instead of dropping it by 0.50% and introducing a minimum 2.5% buffer over the lending rate.
This at the margin buys the RBA more time, and reduces the probability of rate cuts (perhaps the RBA only does one as opposed to two cuts).
It is also much more positive for the housing market than a pure 0.50% rate reduction. I currently pay 3.5% on my mortgage: APRA’s new 2.5% buffer means my bank only now needs to apply a 6.0% interest rate assumption when figuring out how much it lends to me compared to a 7.25% rate previously (banks have added 0.25% to APRA’s 7% minimum rate). So the binding borrowing constraint has dropped a huge 1.25%!
In April we forecast that the housing correction would end if the RBA cuts. We project that APRA’s rate cut combined with the market expectation of two RBA rate cuts will lift Aussie house prices by 5% to 10% in the 12 months after they are implemented.
I currently pay 3.5% on my mortgage: APRA’s new 2.5% buffer means my bank only now needs to apply a 6.0% interest rate assumption when figuring out how much it lends to me compared to a 7.25% rate previously (banks have added 0.25% to APRA’s 7% minimum rate). So the binding borrowing constraint has dropped a huge 1.25%! We estimate that this could increase a borrower’s maximum borrowing capacity by as much as 14% assuming they are paying a 3.5% discounted home loan rate.
My own view is that:
- the APRA cuts suggest both ongoing capture of the regulator and that it is recognising things are now getting quite perilous for house prices;
- the RBA will probably therefore still cut twice as well;
- fiscal support is delayed and will require action that we have not seen yet;
- Aussie unemployment is going to rise in H2 regardless;
- the external pressures are probably the key swing factor. Trade war rhetoric is getting ugly. Markets can adapt but as the US slows and China struggles to rebound, the base case is a grind lower for equities as global growth suffers.
I don’t therefore see an imminent rebound in property prices as the total environment remains quite bearish. But the new FHB incentives in the new year can now trigger greater investor activity with ScoMo in power and credit will be available thanks to APRA.
The base case then is a grind higher for house prices into 2020, provided the trade war scenario does not degenerate into an outright shock, in which all bets are off for markets everywhere. But it is most definitely a kick of the can as the bulk commodity supply squeeze steadily ends, renews the income shock, and begins to crimp fiscal options.
Remember, buying Aussie property is a political economy not market decision!