Why Australia’s property recovery will be muted

Analysts have hosed hopes that APRA’s reduction in its interest rate buffer to 2.5% and interest rate cuts by the RBA will generate a strong housing rebound:

APRA’s change to how banks assess a borrower’s ability to repay their mortgage if interest rates rise has had a neutral effect at the low-end of the market, according to economists and brokers. What has a bigger impact is an applicant’s expenses, their income and their total debt to income ratio – criteria that generally disadvantage lower-end mortgage applicants.

“The reality is lending standards remain pretty tight,” said AMP Capital chief economist Shane Oliver. “If you show up wanting to get a loan, banks still put you through the wringer in terms of your expenses, your Ubers, your lattes, your total debt levels, the balance on your credit cards and if you have other loans.

“It does constrain low to middle-income earners to a large degree because they are often the ones that end up with a higher debt-to-income ratio, and higher loan-to-value ratios,” Dr Oliver said…

First Home Buyers Australia co-founder and mortgage broker Taj Singh agreed the drop in assessment rates only helped “a vanilla” mortgage applicant: a buyer with a 20 per cent deposit, strong income and no debt. But he said the headlines have led house hunters to believe otherwise.

“We’ve had clients say ‘I’ve heard I can borrow this much more compared to previously’, and it’s not the case,” Mr Singh said…

That’s right. While the changes to APRA’s interest rate buffer and interest rate cuts are unambiguously bullish for both mortgages and house prices, they are largely offset by tighter scrutiny of borrower expenses in the wake of the banking royal commission.

According to Endeavour Equities, widespread use of the Household Expenditure Measure (HEM) – a relative poverty measure – to estimate 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”.

With lenders now required to assess borrowers expenses directly, much of the loose lending of yesteryear is gone and unlikely to return in the foreseeable future.

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 should 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 more 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, we are highly unlikely to experience a significant credit expansion. Rather, we are likely to see a gentler expansion of mortgage lending and a muted house price rebound.

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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