Forecasts and hindsight are both interesting subjects, and that’s equally so when looking at our residential property markets.
Not that long ago, just back in early December 2018, I made the following comments, not so much a forecast but more a personal reflection about how the residential market might un-wind in 2019.
“Affordability, access to finance, a possible credit-crunch, taxation policy, population policy and infrastructure policy and all tied up with these three events and until they are out of the way a sort of fog is descending over the residential market.
“That fog is also filling the gaps left by a lack of buyer and developer confidence and is delaying resilience as buyers lack a clear vision of where to head to find their way out of the fog.”
The three events I was referring to, the events creating a ‘fog over the residential property market’ were the completion of the Banking Royal Commission, the NSW State Election and the Federal election.
These three (pretty-big) issues were however, directly impacting housing affordability, perceptions of around a credit-crunch and pre-election taxation policy while, indirectly population and infrastructure policy were important factors concerning the housing market. Now, just 175 days later I’m wondering if the fog over the market has started to lift or indeed has lifted to much sunnier skies?
One thing is clear and that is the media has been rapidly reporting that post the Federal Election, the housing market is looking much more positive fueling improved confidence. A few events, beyond the election itself have helped.
APRA Set to Relax Mortgage Servicing Regulations
Is it time to stop taking about avocadoes? I think it is and knowing that banks mainly exist to lend money, sooner or later, the sometimes denied ‘credit-crunch’ would have to wind down.
However, before looking at the news from APRA (Australian Prudential Regulation Authority) we can reflect that non-bank lending markets grew rapidly in 2015-16 in 2019 there’s been an alignment between borrower demand for non-bank finance. And for their part non-bank lenders have been happy to take on new customers with varied loan options entering the market thus potentially eroding business and revenue for the big-four banks.
There’s evidence to suggest that non-bank finance is thriving as regulatory restriction have kept the banks at somewhat subdued lending levels or at the very least restricted lending.
The stringent credit conditions APRA had imposed on major banks have, although publicly denied, helped to pour cold-water on the housing market, but now, among other welcome news, those polices looks set to change.
Late last week it was revealed that APRA had written to all deposit-taking institutions (the major banks firemost among them) proposing a change to the serviceability calculations for residential mortgages, with the changes including a number of measures in favour of borrowers.
Currently and this measure has attracted recent criticism, lenders were required to calculate a borrower’s ability to service a loan using an interest rate that is the maximum of either a floor of at least 7%; or a buffer of at least 2% above the borrower’s actual loan interest rate.
However, according to APRA most lenders relied on the maximum of either 7.25%, or a buffer of 2.25% above the actual loan interest rate. This had the impact for some borrowers, of pushing home loan repayments beyond acceptable serviceability.
Now in a popular move, it has been announced that APRA plans to scrap the 7% floor, replaced with a policy that allows the lender to calculate a borrower’s ability to service a loan using a buffer of 2.5% above the loan interest rate. However, APRA have stimulated that this must ignore any introductory or honeymoon rates offered at the start of the loan.
APRA is currently undertaking a four-week consultation period to the 18 June, before releasing its final updated guidance.
The review is however, not without qualification. The current APRA guidance rules were first in 2014 the stated aim being to “reinforce sound residential lending standards at a time of (then) heightened risk”.
However, currently APRA notes that while “many of those risk factors remain” – namely, “high house prices, low interest rates, high household debt, and subdued income growth” – a review of the guidance was appropriate. The reasons for this include; record low interest rates, and likely to remain at historically low levels for some time and as highlighted in other recent news fall by as much as 0.75% over the next 6-12 months.
Perhaps the biggest reason, also sighted by some of the major banks, is current the (big) gap between the 7% floor and actual rates borrowers have to pay, because it has become “quite wide in some cases – possibly unnecessarily so.”
Assuming APRA does introduce this change later in June, and assuming that other loan conditions remain stable including loan to value ratios the impact has been seen as positive as it would generally increase the borrowing capacity of new borrowers.
The change for a borrower will depend on the rates on offer, although there is currently a large number of loans around 4% mark.
Current indications are that the RBA will cut rates sometime over the next few months and this creates more possible up-side for borrowers. As this policy shift would free the bank’s ability to pass-on RBA official interest rate cuts through the new borrowings by removing the floor of at least 7%.
Added to the above possible policy shift by APRA, is news the Federal Government will soon offer new assistance to first time buyers. While, in Sydney the completion of the first major stage of the cities North-West Metro may encourage further faith in the delivery of infrastructure.
All of these events have the potential to create much more confidence in the residential property market. The question now is how will prices react over the next 3-6 months, creating more room for forecasts to which we can apply hindsight in December this year!