APRA’s mortgage buffer loosening won’t deliver new house price boom

The ABC’s David Chau has penned a good summary of the likely impacts from APRA’s reduction in its interest rate buffer to 2.5%, which was announced on Friday:

Effective immediately, banks no longer need to apply a “stress test” to see whether their customers can afford, at least, a 7 per cent interest rate on their residential home loan repayments…

The only restriction is that the banks ensure borrowers can repay their loans if interest rates were at least 2.5 percentage points higher than they are currently.

With many banks now offering variable mortgage rates in the low-3s, that means many borrowers are likely to be tested at a rate below 6 per cent per annum as banks decide whether they can afford to repay their loan…

These record low rates mean APRA’s rule changes will allow people to borrow a lot more.

A family, earning an household income of $109,688, would be able to borrow up to $60,000 more, if their loan was assessed at 6.25 per cent instead of 7.25 per cent, according to financial comparison website RateCity.

Its analysis suggested that a single person, in the same scenario, may be able to borrow an extra $50,000.

“Many Australians may suddenly find they can get their home loan approved,” RateCity research director Sally Tindall said…

“APRA has eased off the brakes slightly, but that doesn’t mean it will be a complete field day for borrowers.

“There are still a number of checks and balances in place to make sure people aren’t jumping into home loans they can’t afford to repay”…

Investment bank UBS forecast that prospective buyers might be able to borrow up to 14 per cent more due to the RBA rate cuts and APRA’s loosening of lending restrictions.

“However, these changes need to be considered in the context of ongoing tightening, in particular a new HEM [Household Expenditure Measure] methodology, the rollout of comprehensive credit reporting and open banking,” UBS banking analyst Jonathan Mott wrote in a note last month.

That’s right. While the changes to APRA’s interest rate buffer are unambiguously bullish for both mortgages and house prices, they are likely to be somewhat offset by tightening of the Household Expenditure Measure (HEM) – a relative poverty measure – in the wake of the banking royal commission.

According to Endeavour Equities, using the HEM to measure borrower expenses “upwardly biased Debt Service to Income ratios by 10-15%”, and “the size of the credit crunch is directly proportional to the unreasonableness of the HEM expenses benchmark”.

A modified HEM will soon come into effect that will more accurately match expenditure benchmarks with income. According to UBS, this will constrain credit availability going forward and could offset much of the stimulus coming down the pipe:

Looking further ahead, the outcome of Westpac versus ASIC case is going to have a direct bearing on the legality of the benchmarks. So too will the outcome of private class actions, such as Maurice Blackburn alleging that Westpac was overly-reliant on the HEM benchmark when assessing mortgage loan applicants.

If Westpac loses these cases, then ADIs may be forced to abandon the HEM altogether and rigorously scrutinise a borrowers’ capacity, with the end result being even tighter credit availability.

While the outcome of these cases is up in the air, it is unlikely there will be a new credit explosion. Rather, we are likely to see a gentler expansion of mortgage lending and moderate house price growth.

unconventionaleconomis[email protected]

Comments

  1. Anecdata from my area in Sydney shows the boom has returned – asking prices up around 8% from two months back. A lot more vendors are opting for auctions, too.

  2. Monday 7 weeks ago after the election the Sydney Corelogic index was at 151.48. Today it’s at 151.46. Melbourne was 139.72, today it’s 139.81. I was expecting to see a pronounced rising trend in these datasets by now, but it hasn’t eventuated yet.

    The systemic price declines of the last two years have certainly stopped. While some areas may be experiencing bursts of increased prices there must be other areas that are still declining because I read both of those results as being flatlines.

    Stabilisation is certainly better than declines for the house spruikers, but calling completely sideways motion a boom is the sort of lies and bullsh!t analysis one would expect from the FIRE sector under these circumstances.

    Prices might start to trend up gradually, but this doesn’t look like any sort of boom at the moment, and it may well be a bull trap.

  3. Let’s get back to reality.
    No one is adjusting their HEM because no one is going to check. So forget about that offset.
    Got pre approvals well before and well after the royal commission and even though we had a kid which really increased our expenses and my wife stopped working, we could borrow the same amount.
    No one checked expenses and no one bothered to adjust incomes.

    I cant say what has caused the slow down but its not Banks unwillingness to lend. I would say foreign demand has had a bigger impact than we think. Canadian banks only stress test to +2% and they think this is what drove the market down. The common factor between our 2 countries is foreign buyers

  4. HEM!!!! LOLOLOLOLOL. What makes you think they won’t change that with the stroke of a pen just like the stress test? The minute any constraint to lending is identified Frydenturd will demand APRA and the banks send up the helicopters.

    On another note I saw Roger Montgomery completely changed his tune on housing all of a sudden (towards the bulls). Turns out he’s bought another and is offloading his current digs! Everyone talks their own book. End of story.

  5. Went into ANZ to deposit small amount of cash today. I do this every few weeks normally with the same teller. For the first time today she started trying to sell me a mortgage offering 300000 frequent flyer points… I could see she felt awkward.

    • ANZ is the saddest right now. They’re desperately trying to convince young FHBs they can still afford to buy anything decent. Happy for the marketing firm that gets to convert ANZ’s cash into transparent rubbish though.

  6. Jumping jack flash

    All I see from this move is more debt while incomes remain stagnant, and the increased gouging of living expenses (to obtain more debt and keep up with living expenses) continues.

    It makes perfect sense though because everyone who’s anyone knows that interest rates aren’t going up at all for at least 30 years from… now…. umm, now…. waiiiit… now!

    well, anyway, 30 years from when the last massive, economy-crushing load of debt is handed out.

    wait until they start issuing 40+ year mortgages.

  7. Prices may be up or down in 12 months time. But guess where they’ll be in 5 years, and 10, and 20. Instead of sitting eating avo on toast whilst playing with oneself in momma’s base, buy a damn house you can afford and pay it off.

    • BubbleyMEMBER

      That’s the point Andrew “buy a damn house you can afford” doesn’t exist.

      When you bought your first house back in the 1980’s/90s, it was only 3 times your income. Now its 8x household income, as in both you and your wife’s income.

      It ain’t like it used to be. So when you condescending blame avo on toast and living in their mothers basement, I know you are old, likely retired and detached from the reality facing our youngest generation.

      We are screwing our kids over and it is deeply unacceptable that this generation really truly does not have the opportunities you had.

      • Not even close. Millennial. Worked, budgeted, saved, planned, bought modestly relative to income. Sorry that the houses you can afford aren’t your dream home, but it’s your choice to remain a serial renter and avocado eater.

      • BubbleyMEMBER

        “bought modestly relative to income”

        Most people don’t have this choice Andrew. The average retail worker makes around $800 after tax. How can they save for a deposit on that? by living in a basement?

        Home ownership in Australia has dropped from 80% to 60% in the last twenty years.
        This is not because people are living on Avo Toast, its because wages have flatlined for ten years +, penalty rates have been cut and housing keeps escalating to preposterous heights for the “average” aussie. First home buyers are also having to compete with the SMSF twenty years of enforced saving in the generation before them.

        As for being “sorry that you’re a serial renter and avocado eater” that is a weak passive aggressive response because we know you are not sorry at all. You’re being smug and condescending.

        This site is called Macro Business for a reason. It looks at the big picture. This country is in the top 5 the highest personal debt levels in the world and most of it is mortgages. All it would take is a one black swan event and our fragile economy would fall over. Also with home ownership levels dropping we (Australia) is going to face massive headwinds when your generation retires. Our superannuation system is based on retirees owning their own homes.

        Are you now interested in why its important?

      • Yeah, you feel free to keep telling people why the ordinary man can never get ahead, and I’ll keep advising them of what they need to do to win.

      • I think we need to notify Reusa that his gimp has escaped again and is sh*t-posting on MB in earnest.

    • Looking for a house currently… Sick of condescending people like Andrew. No surprise boomers are the most despised generation with his ilk and similar views among many of them.

      • Seen it, another smug response, well done it must take some effort to be you. You’re the completely unfunny real version of reusa… minus getting any relations.

      • Who’s trying to be funny? I can’t stand the self entitled whinging of people not prepared to make any sacrifices, who then try to bring young people down to their level. Nothing funny about it.

      • Yeah, good luck with that. Magical cheap houses with big back yards close to the city that none of the other millions of people who want to live there are going to bid up. What a clown you are.

      • You’re right. House prices have never crashed anywhere else in the world.

        And according to your logic they also can’t crash here, because we have cities, people and houses!

    • From the linked article…

      CoreLogic analyst Cameron Kusher said …

      “When relatively few properties are selling at a loss it’s a general indicator of a stronger housing market,” he said.

      “If a higher proportion of properties are reselling at a loss, it’s a sign of weaker housing market conditions.”

      FMD, now that’s what I call penetrating insight from Mr Kusher! I hope they didn’t pay too much in consultancy fees for that…errmmm…analysis.

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