Saturday week Australia will vote in the Federal Election and among the key topics grabbing our collective attention, according to a survey conducted by the ABC, will be the environment, finance and jobs.
However, there’s also a group of topics directly related to property and these include housing, planning and infrastructure and population growth. It’s an election where housing is a priority and it appears will be on the mind of many voters and a key concern will be access to housing.
That naturally quick translates into housing affordability and finance. Finance is currently a hot topic and that’s partly as a flow-on from the banking Royal Commission where one legacy and possibly long-term legacy, has and remains much tighter credit and that’s impacting the flow of housing loans.
As voters scratch their head about which party’s policies might better stimulate the housing market, and create better access to finance, they might also be left wondering why the screws have been tighten to such an extent on their ability to access a home loan. After all, the Royal Commission mainly pointed the finger at the somewhat dubious machinations of the finance, banking and insurance sectors and not at naughty consumers.
Still it appears that those seeking a home loan and possibly looking for some form of help after the election, are being unfairly targeted and impacted by very strict loan applications, and are increasingly asking is this fair?
Which brings me to the not so humble role of avocadoes.
A few years back one commentator in particular suggested that a key reason why young Australians could not afford a house was because of the money they spent indulging their love of ‘smashed avocados’. The idea caught on and even entered urban folk-law, but now I suggest we need to rethink this notion.
My reason is that now this addictive habit (for some) and other similar lifestyle habits, like riding in an Uber car or having Uber takeaway delivered somehow makes you a credit risk.
With the ridiculous flow-on being to possibly limit someone’s access to a home loan because of lifestyle considerations, all in the name of responsible lending!
Crushed by an Avocado
Setting aside external factors like interest rates, supply and demand, it is evolving and maturing lifestyle changes that drive residential property markets.
Individual constantly change over time and this drives demand for buying and selling and the shape of the property market.
Is it not reasonable to suggest and accommodate the reality that as we age and mature our lifestyle choices will change. For most of us when we come to buy a home we accept that some financial changes will be necessary, we change our spending habits to meet our home loan repayments.
Not only will we reduce our intake of crushed avocadoes, and reduce Uber takeaways, some of us even go as far as delaying having kids so that we can repay our home loan.
Singles are also combining earnings to further boost their borrowing capacity. There’s also another trend with adult children living with parents to help save bigger deposits.
My point is, does the average home loan application really need to be stress tested to the measures that appear to now be relevant among the major lenders?
One key measure is the ability to meet repayments if interest rates rise and according to the regulator’s guidelines that a rate of 7%.
This rate looks very high and well beyond reason given our very stable and ultra-low interest rates. Interest rates that might even drift lower over the next 6-12 months.
If interest rates were to reach 7-7.25% that would mean on average existing loans would have to attract increases of 3-3.5% on a wide range of mortgages.
An increase of this level would require a massive change in local and international economic settings. The Reserve Bank would have to lift rates a dozen or so times in quick succession to around 4-4.5% and at the same time bank funding costs would have to sky-rocket and there’s little evidence this could happen at a time of ongoing low rates.
There are a number of powerful forces driving the housing market such as technology, urbanisation and economics and naturally household size and composition.
Those seeking a home loan are also increasingly entering the market with larger deposits beyond the traditional 10% and the notion that an appetite for avocado or Uber takeaways should possibly end the ability to secure a home loan looks to be an overreaction.