APRA's Recent Change To Borrowing Criteria

Once again the main property discussion point last week has been focussed on APRA's recent change to borrowing criteria. With this in mind we have featured an article that appeared this week on realestate.com.au that discusses the possible ramifications of APRA's intervention and what likely outcomes may emerge moving forward.

Amongst last week's information is a link to a report that was released online this week from "The Urban Developer". The report specifically focuses on the Gold Coast property market. The statistics and insights are terrific and is perfect to keeping you all up to date with the latest local property trends. The link can be found below this articles.

APRA’s light touch is toe-to-toe with freedom, what happens next? 

This month the financial regulator made a much-anticipated move to slow the housing market.

The timing is interesting, with the data showing that after a prolonged lock down, Sydney and Melbourne – Australia’s largest property markets – are well and truly geared up for a late spring selling season. 

The question then is; will the changes have much of an impact on markets? And if not, will lending be tightened further? 

First off, what’s changed? 

On October 6 the Australian Prudential Regulation Authority (APRA) announced changes to the serviceability buffer it expects the banks to apply when assessing home loan applications.  

The result of which will impact the maximum borrowing capacity of different cohorts. In a normal market, the impact of these changes may be easier to predict. But this is no normal market. 

Although it's early days, regulators may indeed need more substantial measures to cool Australia’s hot housing market. 

APRA’s changes have started small and while borrowers borrowing their maximum amount will no longer be able to reach the price-point they could previously, not everyone borrows at their maximum capacity.  

The changes only reduce max borrowing capacity for most borrowers by around 5%. And with vaccination thresholds being met nationwide activity is clearly picking up as confidence returns to the market. 

The move from APRA appears to be somewhat pre-emptive – a shot across the bow to lenders to reign in high debt-to-income loans as restrictions ease. 

Recently the Council of Financial Regulators (CFR) warned on the need for lending standards to be upheld, citing signs of “increased risk taking” appearing in mortgage lending.  

Housing debt-to-income ratios are at record highs for owner occupiers; the latest APRA data showed 22% of new loans originated with a debt-to-income ratio greater than 6 times through the June quarter; and housing credit is growing at a 3-month annualised pace of 8.1%, outpacing income growth. 

What’s next – more tightening to come? 

Much of what happens next will lie with the ongoing availability of credit. 

The light touch approach leaves the door open for APRA to bring in more complex, tightening measures. They’ll do that if credit growth continues to outpace income growth, and fails to slow as borders reopen, discretionary spending is diverted elsewhere, and enforced savings taper as life returns to normal.

For those wondering what further macroprudential measures in Australia could look like, the Reserve Bank recently took a look at what's being used abroad. 

Though naturally there is a fine line here for the regulator to tread given the strong linkages between household consumption, the largest component of GDP, and household wealth in maintaining the post-pandemic economic recovery. 

What about price growth? 

Rate cuts and resultant record lows in mortgage rates have been the key to credit growth and the boom in house prices. But rates are not going any lower and the availability of credit is beginning to tighten at the margins.   

For owner occupiers mortgage rates on new loans fell from around 3.2% in February 2020 to currently sit at 2.36% (August 2021, RBA). So, with the same monthly principal and interest payment over 25 years, you can borrow roughly 10% more money.  

However, since February 2020 according to Proptrack dwelling prices across Australian capital cities have increased 21%, for houses that figure is 26%. Hence, the benefit of lower mortgage rates is largely spent for buyers (with the exception of existing owners). 

With the benefit of lower rates now largely baked into prices, and no commensurate pick up in incomes, affordability is deteriorating.  

Further, mortgage rates have bottomed and as deposits taper and bank funding costs rise, we may begin to see a trickle through of higher fixed mortgage rates next year. 

Then there’s discretionary spending. As restrictions lift in NSW and Victoria, and borders reopen, people will be back to spending on eating out, holidays and entertainment. 

And on top of this you have APRA’s latest move, which should slow credit growth and housing market momentum at the margins. 

All told, the cooling of double-digit price growth and a moderation in market activity seems inevitable. And any further changes that affect the availability of credit would further shift market dynamics. 

Though with economic growth gathering pace from its delta induced dip, a resumption in international migration impending and rates remaining low, activity is likely to remain strong for now, albeit with prices growing at a slower pace.  

Please see below The Urban Developers Gold Coast Housing Market update for October 2021.

This is an excellent report that I wanted to share with you.

https://www.theurbandeveloper.com/articles/gold-coast-housing-market-update