Tightening lending standards hammer house prices

Cheap and easy access to mortgage credit was the fuel that lifted Australian house prices by 35% over the pandemic.

Now the housing market is facing the polar opposite forces, with mortgage rates rising at the same time as credit is becoming more difficult to obtain.

The Reserve Bank of Australia (RBA) has only hiked the official cash rate (OCR) by 0.75%, yet fixed mortgage rates have already more than doubled from their pandemic low with variable rates set to follow:

Economists tip that Australia’s average discount variable mortgage rate will climb to around 6% by mid next year, whereas the futures market is tipping the rate to climb to over 7%.

Under either scenario, Australian mortgage holders are facing a huge rise in repayments, which will place serious downward pressure on house prices.

The price falls will be exacerbated by Australian banks tightening borrowing conditions, squeezing buyer’s purchasing power:

Residential property buyers are having to provide lenders more details about spending and income as living expenses soar, experts say, squeezing their capacity to meet rising mortgage costs, particularly in high-cost Melbourne and Sydney…

“Borrowers and lenders are growing nervous as cheap loans come to an end and regulators turn up the heat,” says buyer’s agent Phoebe Blamey, a director of Clover Financial Solutions.

The Australian Prudential Regulation Authority (APRA) recently wrote to lenders warning them of the need to tighten scrutiny of “higher risk residential” borrowers, such as loans at a high debt-to-income multiple or high loan-to-value ratio…

Latest policy changes by lenders to tighten terms and conditions for mortgage borrowers include: Increasing deposits and reducing the amount lenders can borrow [and] tightening evidence of income…

Exclusive analysis by RateCity, which monitors lending rates, reveals the maximum borrowing capacity of individuals and families will shrink by up to around 18 per cent as rates continue to rise…

Estimated borrowing power

Other analysts, such as Carlos Cacho, chief economist at investment bank Jarden Australia believe rising rates and pressure on discretionary spending will result in a 25 per cent fall in borrowing capacity…

If the sharp fall in interest rates was the key driver of the Australian house price boom over the pandemic, then surely ramping up interest rates in concert with tighter lending standards will have the opposite effect in delivering a major house price correction.

Interest rates and credit availability are a double-edged sword.

Unconventional Economist
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Comments

  1. UpperWestsideMEMBER

    “Jarden Australia believe rising rates and pressure on discretionary spending will result in a 25 per cent fall in borrowing capacity”
    So what is the beta of borrowing capacity to house price?
    I am sure it is an inverse non linear relationship but some data would be interesting

  2. The other factor is rising household costs caused by inflation without subsequent wage growth which would also reduce borrowing capacity

    • Well let’s see what transpires, whether they save it before the crash as they always have managed to in order to save house prices or do they wait till after the crash to pick up the carcuses of the banks, which doesn’t actually save house prices.
      My guess this time is, inflation is different.

      • The momentum will be so strong down, rates will come down from unlimited QE, but they’ll come right down as the banks are collapsing, so where rates are won’t make a difference. Prices will be 40 to 50% down this time next year . & the banks are being bailed out
        This is about to get very nasty
        I was out with friends
        They’ll close the banks
        Switch off online transfers
        Guess ETPOS & all,electronic transactions will be switched off
        Supermarkets & all stores will be shut & maybe need to be boarded up
        Rationing will be out in place
        They will set up food tents in parks

        This is going to make covid the walk in the park that it was

        AUST property crash will be the worst ever property crash we’ve seen throughout the world

        • 2023HomelessMEMBER

          How does being out with friends drive the prophecy of doom? Not sure the link.

        • Goldstandard1MEMBER

          I’m always interested in the concept of banks closing. So even being long cash under the 250K insured threshold ain’t helping that. People keep saying rates will be cut again when things are bad but inflation will still be too high. So they’ll be stimulating into inflation to save housing. Interesting times.

          • Arthur Schopenhauer

            Super funds will be drained before any of the big four have to be rescued.

          • Rates will stay up another 3 or maybe 4 months
            They’ll be cutting from Oct Nov l
            Inflation is peaking
            Oil will start falling over next month or 2
            Bond yields will be negative next year I’d say 10 year Aust Gov bond negative

            Short end & cash rate might be 2% negative or even more negative
            Not sure how negative the cash rate will go will be interesting

          • Ronin8317MEMBER

            If there is a bank to watch out for, it’ll be Judo bank. It is offering very high interest rate for term deposits right now. Look at the people behind it and you’ll see a very familiar name.

          • Didn’t the banks get a massive bailout at the GFC? What was it, $800B? When the entire country told Hank Paulson and George W to NOT give money to the banks?

            If we are anywhere close to the situation resembling the US housing crash, the “bad” loans will be taken off banks, put into an Oz version of Freddie/Fannie, at a low rate fixed mortgage, and the money will be printed to make sure there is liquidity. AUD down, value of exports up (in AUD terms), cost of imports up driving wage inflation, you beauty!

        • Arthur Schopenhauer

          It’s not Sri Lanka yet.

          None of that happened in the US during the GFC, but a lot of people lost their retirement funds, and many lost their homes.

          Super funds will be raided for repayments. And in a way, it was always baked in, as Super account balances are included in loan assessments.

        • MMT
          TFF V2 on existing debt
          Government work programs
          Infrastructure builds
          Superannuation
          Foreign buyers

          So very many things they can do before any of that happens. You are also surmising that people just accept their fate and give up to die on the streets. If it really gets as bad as you make out, banks will face a wall of class action for a breach of Prudential standards, they will have to write down the losses, not the consumer. If a bank goes to the wall, who cares? Pages 12, 13 and 14 of the APRA rules around collateral, have a read and figure out who’s responsible for poor valuation practices. (https://www.apra.gov.au/sites/default/files/Prudential%20Standard%20APS%20220%20Credit%20Risk%20Management.pdf) It then comes back to the consumers ability to repay on the lower (new) valuation.

        • When will interests go back up if you predict “Rates will stay up another 3 or maybe 4 months” and when will house prices star to crash with interests rates above 17%? Where should people with cash buy their cash if banks will also close?

  3. Vivian DarkbloomMEMBER

    > Interest rates and credit availability are a double-edged sword.

    I really don’t get the point of this statement. It’s like finding ‘seasons is a double-edged sword’ on a weather app, ‘nutrition is a ‘doubled-edged sword’ in a diet advice column, or ‘speed is a double-edged sword’ on carsguide.com.au. It sounds both profoundly insightful and slightly threatening, but has no meaning beyond the definition of the sentence’s subject.

    So why make it repeatedly?

  4. Deflating asset prices are of concern ONLY if policymakers REFUSE to respond appropriately.

    Fact 1.

    Inflating the prices of existing assets especially residential housing was foolish.

    Fact 2.

    Driving general economic activity with asset price inflation related bank credit was also foolish

    Fact 3

    Eventually there would be too much household debt and asset prices would stop inflating as interest rates approached zero.

    Fact 4

    What is important is NOT falling asset prices but supporting economic activity. If economic activity is supported it does NOT matter if asset prices fall. Supporting economic activity with household debt driven by falling interest rates is a dead duck…..some of us have been saying this since the GFC.

    Fact 5

    If economic activity is sufficiently supported unemployment will fall and eventually that will result in inflationary pressure and interest rates will inevitably rise and asset prices are likely to fall.

    So let’s stop crying about falling asset prices, especially falling prices for an essential like shelter and start talking about reforms and policies that actually support economic activity and full employment (slow immigration, productive public and private investment, reserve accounts for all at the RBA) and celebrate when we are so successful that interest rates are no longer at levels that demonstrate the failure of the ideology of monetary policy maniacs and bank credit deregulation obsessives.

    • Vivian DarkbloomMEMBER

      I could not agree more but this recipe, if actually adopted, would fall prey to translation issues. Notably, Fact 4 would be fully misconstrued because in Australia, ‘economic activity’ IS leveraged property speculation as well as all the hanger-on industries (from REA, property staging and strata management companies to conveyancing and tax optimisation advisory, let alone industries fueled by paper equity that are too numerous to mention here) rather than quaint productive economic activity as per Macro 101.

      • pfh007.comMEMBER

        Yes, Fact 4 will be the battleground but so far there is barely the sound of a rusty musket.

        It baffles me how so many are moaning about the RBA responding to inflation and the potential impact on bloated asset prices when there are loads of policy options available that are vastly superior and ensure that everyone who wants to work has a bunch of eager employers to pick from.

        We must reject the Stockholm Syndrome imbedded in the private banker’s binary “….don’t touch our control or the economy gets it…”

        • Vivian DarkbloomMEMBER

          Again, I agree from a technical perspective. The issue, however, is that economic models are tightly intertwined with social models, and the proposed solution effectively requires rebuilding the social fabric of Australia to underpin a productivity-focused economy. The key obstacle will be the current system of financial feudalism that will continue to grant itself and those who support it the privilege of free money, and to argue your point is really to argue the demolition of the power of the financial sector over society as a whole.

          I am not aware of any country that pulled this off successfully: in 1994, South Africa started to pivot from a resource extraction economy enabled by modern slavery. Almost 30 years later, the country is in tatters and will arguably never reach that goal, while its financial sector is continuing to do very well. In fact much better than ever before.

          Australia will be the same.

          • Arthur Schopenhauer

            We’ll put. The ‘power of the financial system’ over the economy is the intended outcome of 40 years of neoliberalism.

            The cure is very hard to engineer without collapsing the economy. And even if the non-mining economy did collapse, the existing beneficiaries would want to rebuild it in its old form.

            Edit: Chile and Argentina have the same challenge.

          • Jumping jack flash

            “I am not aware of any country that pulled this off successfully”

            1930s Germany and it required a LOT of nationalism.

          • Strange EconomicsMEMBER

            A big part of the pivot problem not working for South Africa seems to be corruption (ie state capture and massive benefits to groups connected to the govt). Australia has this, but a mild dose of this compared to South Africa.

          • pfh007.comMEMBER

            Vivian D,

            Yes – it will be difficult but things change all the time including things deeply and tightly woven into social models. Gay people were still being tossed off cliffs just 30 years ago and now they are getting married.

            While I appreciate that the current beneficiaries will resist change we have seen that change is still possible. After all a bunch of well connected and protected industries lost their protections during the 1970s – 1990s despite their connections.

            I think it is quite possible to argue for the following and to achieve change.

            1. Reduce the protection of the banking cartel by allowing all Australians and non banks to operate zero interest reserve accounts at the RBA. This change is no different to the removal of state protection of a bunch of other industries in the 1980s.

            2. Arguing for support for new housing construction and reducing taxation and other support for speculation in existing housing assets. It is not easy to oppose support for new housing construction as it is generally a vote winner.

            3. Arguing to reduce the rate of immigration and setting an unemployment goal of over never above 4% (preferably never above 3%) . Despite the valiant attempts of big business this is also a vote winner.

            4. A tobin tax on international capital flows to reduce speculative flows.

            These are all very modest objectives and many of them are already established policies of our trading rivals.

            There is a tendency towards pessimism in Australia that means that when change does happen, as it invariably does, that people are shocked but quickly insist that any further change is impossible.

            If they were a bit less pessimistic we could achieve a lot more reform and faster.

          • Just to emphasis what Vivian (or is it Vlad) was saying.
            At the moment I’m trying to hire an Engineer with real world experience in a SLAM (Simultaneous localization and Mapping) This shouldn’t be a difficult task because it has been a hot topic in Robotics and Autonomous systems for at least a decade now.. But I simply can’t find anyone with real product development skills in this area. Those Engineers that I can find seem to all be professional report writers, completely obsessed with risk.
            My point in sharing this is that even the few in Australia with the right technical skills have completely the wrong mindset to ever be effective in a Product Development role.
            Lots has to change before we regain our footing in the global economy. This business revitalization will require a social change that far exceeds the economic change and all done in a time of tight budgets .

    • Arthur Schopenhauer

      Throughout history, societies that cannot be truthful with themselves fail.

      The neo-liberal experiment has failed. That is a truth the West is deaf to.

      • Camden HavenMEMBER

        You are correct in as far as the answers or solutions are to be discovered in philosophy

  5. Quantitative FleecingMEMBER

    2020: JobKeeper payments, HomeBuilder stimulus
    2023: HomeKeeper payments? JobBuilder stimulus?

    • Well if the 2020 one brought about this much inflation, needing the rba to knife the property market in a quick hurry, can’t wait to see what those other two will bring! 10% IR here we come. Housing ain’t surviving at current prices at that.

  6. Mike Herman TroutMEMBER

    I thin sometimes people forget that this is not just about Australian property. There are alarm bells going off everywhere. This is a global event. Mass contagion. The Australian government and RBA are taking a knife to a gun fight.

    • Jumping jack flash

      Precisely.
      And just recently there was multi-trillion dollar stimulus plonked into the economy and inflationary policy initiated by all the G7 nations…

      Then all of a suddden, for no obvious reason, it was all stopped and now we have rising interest rates as far as the eye can see. The result of doing this action in a global economy structured in the way that it is, is fairly obvious…

      One has to ask “why?”. But the answer hasn’t revealed itself to me yet.

  7. There are a bunch of folks (ok many are boomers) who are not leveraged. Yes the buyers at the margin will send prices down but as above this is not just about property. So, these unleveraged folks won’t sell. Many will get out of the sharemarket and many will have cash – if it goes as pear shaped as some are thinking they’ll take that money out of the banks.
    These folks don’t trust crypto and don’t buy precious metals. Guess what they buy – property.

    Appreciate the wisdom of many on this site but sometimes I think you are right in theory but the weight of money behind the average punter means being right in theory is wrong in practice.
    So to my (admittedly simple) way of thinking this puts a floor under aussie property and if anything in a relative sense reinforces it – this is carnage but at least property is the best of the mess?

    • Goldstandard1MEMBER

      I think as history has shown us, whilst land is tangible (vs say shares and crypto), it is still a speculative item that sells to the greater fool that generates no/limited income. Investors buy it primarily for it’s capital growth vs rental income. So it stands that there is dumb money in this space and it will fal by a lot – timing of when something actually breaks is the tough part because that is when kitchen sink will stop being thrown at it.

    • Holiday In ScomodiaMEMBER

      If we really are going to implode completely, ‘bricks and mortar’ will be looking good- especially if it’s on sale. You can’t grow veges in a share portfolio, or lease out the back yard of your ETFs for your relos to live in their tents..

    • 2023HomelessMEMBER

      I would have agreed with you in 2001 and 2007 when the boomers were mostly working and tax incentives on property helped. But I suspect the boomer money will no longer head to property so much, due to no income tax to offset, lower risk tolerance in retirement, and issues getting bank loans as they aren’t working. My guess is this time around, the weight of boomer money will move from riskier shares and property to…cash. Obviously not across the board, but more so compared to past cycles.

      Beware the aging boomers with less risk appetite. They will cash in their property cheques and retire rich.

      • Thanks – makes sense unless there is a fear the banks might fail or lock your funds away. Pyramid building society, etc?

        • Arthur Schopenhauer

          It’s not the same as 2007/2009 USA 🇺🇸, and it’s hard to say if 55 plus Australians are in better or worse position.

          Here’s a few observations from being in the US in 2009:
          1. A lot of people over 55 were made redundant.
          2. A large number of pension funds collapsed.
          3. A significant minority of Professional people lost their entire retirement savings.
          4. Those with chains of investment loans went broke, or were forced back to a single house with a mortgage. Often a weekender in the middle of nowhere.
          5. For the every-person, the GFC was almost a decade long.
          6. It takes time for economic collapse to make its way through all sectors of the economy.

          And that was when inflation was practically zero. With inflation heading to 10% and the drums of war beating, it’s a novel scenario for Australian Boomers, and the rest of the country too.

          • The 10% inflation issue for me will likely pass in short order. With costs spiraling and recession ‘incoming’ people will stop spending, demand will collapse right beside CB QT. Less of everything coming in short order the same way it went up in short order. With less demand, supply chain bottlenecks disappear. Oil and gas increases will be balanced out with other areas of spending decreasing.

            HnH and LVO are right in my view that this is all short lived, CB’s will overshoot, crash economies and will then need to print again to stimulate. There will be a lot of demand destruction which will take time to recover from. Governments wont be innovative/brave enough to change the social structures needed for true reflection and growth.

            As always, asset and cash rich will make the most of the ‘good buying’ opportunities and further entrench the wealth divide. Boomers will be fine along with the elites. The young un’s will get crushed, again.

    • Jumping jack flash

      Perversely, those who want to “punish the boomers” by burning down the economy will probably find that boomers are in the best position to weather it out, because as you say, many are not leveraged and many have unemcumbered inventment properties they rent out.

      Some will fall by the wayside, of course, but it will be the working class that will be punished the most due to the debt they own and rising interest rates, and the destruction of demand, wages, and jobs, plus gouging of essential living expenses.

    • Oooooh, I love me a random Yogi Berra quote: “In theory there is no difference between theory and practice. In practice there is.”

  8. Jumping jack flash

    First house prices are hammered by the removal of debt growth from an economy that is pretty much defined by debt growth and the spending of that debt. Then demand will be hammered. Then jobs and wages.

    At the same time as demand falls, and wages and jobs shrink, inflation makes everything more expensive – at least initially due to the gouging of essentials, and rising interest rates make all the debt more expensive.

    Throw in a few bank failures and its going to be fun, fun, fun for everyone. I hope people hanging out for cheap houses keep their jobs because nothing will be safe except maybe civil servants.

    And to think it looked like they were trying to avoid this scenario just a few months ago.

  9. My mate just got requoted by Big Mac ~6.75% on 2 yr Fixed vs 3.49% in March’22. House prices are nowwhere falling at the rate which rates are rising. There is a massive confidence in the RBA/Feds losing their nerve and restrating QE by year end!

  10. re: That comment about boomers taking their money out of the sharemarket and taking their money out of banks and putting this money into property.

    The model behind that comment is that the sharemarket is like a cupboard where a sack of coins can be placed and later withdrawn. Similarly a bank is a huge vault where coins are stored in, to be withdrawn at one’s will.
    This model is not correct. In fact there is no cash available to come out of the sharemarket, nor banks. Any money going in must be balanced by money going out.

    It is a hard concept to grasp I will admit. Asset prices are driven up by the creation of extra money, and driven down by the destruction of money (bank credit money to be more precise). Will the elites perform creation or allow destruction? That is the question.

    • Hill Billy 55MEMBER

      Good points. Depending on whether the Fed, and as a corollary, the RBA have grown a spine, the demand destruction will succeed if they stay the course. Because inflation is more dynamic than its being credited with, I expect the destruction will last longer than anyone thinks. Powell seems to be ready for the long haul. The commentariat are talking their books in saying that interest rates will come down sooner than later. To me it’s wishful thinking at best, and arrogant manipulation at worst.

      • China led globalisation has exported goods deflation to the world for the last few decades (particularly since they entered the WTO in 2001). This process is now in reverse. The end of China led globalisation represents a structural change that will see higher overall inflation going foward.

        I think inflation will be more persistant that currently anticipated.

  11. pfh007.comMEMBER

    Vivian D,

    (moderation grabbed my comment further up )

    Yes – it will be difficult but things change all the time including things deeply and tightly woven into social models. Pride people were still being tossed off cliffs just 30 years ago and now they are getting married.

    While I appreciate that the current beneficiaries will resist change we have seen that change is still possible. After all a bunch of well connected and protected industries lost their protections during the 1970s – 1990s despite their connections.

    I think it is quite possible to argue for the following and to achieve change.

    1. Reduce the protection of the banking cartel by allowing all Australians and non banks to operate zero interest reserve accounts at the RBA. This change is no different to the removal of state protection of a bunch of other industries in the 1980s.

    2. Arguing for support for new housing construction and reducing taxation and other support for speculation in existing housing assets. It is not easy to oppose support for new housing construction as it is generally a vote winner.

    3. Arguing to reduce the rate of immigration and setting an unemployment goal of over never above 4% (preferably never above 3%) . Despite the valiant attempts of big business this is also a vote winner.

    4. A tobin tax on international capital flows to reduce speculative flows.

    These are all very modest objectives and many of them are already established policies of our trading rivals.

    There is a tendency towards pessimism in Australia that means that when change does happen, as it invariably does, that people are shocked but quickly insist that any further change is impossible.

    If they were a bit less pessimistic we could achieve a lot more reform and faster

    • Display NameMEMBER

      I like your optimism. The plan sounds reasonable. Like all these processes there are winners and losers. We need a situation where the losers have less to lose….