A home loan crackdown has been coming to take the heat out of the property market and APRA has fired their first shot, ordering banks to lift their buffers from 2.5% to 3%.
What is a servicing buffer you may ask?
Effectively, if your interest rate is 2.3%, the banks will now (as at 30 October 2021) stress test your ability to repay that debt at a 5.3% rate (and if you were borrowing at 3%, it would be tested at 6% etc), to ensure households have the ability to service their debt at these higher levels.
Why where these steps taken?
Globally, as a result of the incredibly cheap debt that has been available, it has exacerbated the inequality in affordability of housing which is creating enormous social issues. Countries like Germany are taking extreme stances with nationalising houses owned by corporates. Other countries closer to home, like New Zealand, became one of the first developed countries to increase interest rates since the pandemic started to stem their heated property market.
Our Reserve Bank has continued with its stance that they won’t be increasing the cash rate until 2024 – and rightly so. It is very difficult to manage both inflation (their primary concern), and house prices, with the cash rate. There are other fairer measures available to manage the rising household debt without affecting the rest of the economy – and an increase to aforementioned buffer is one of them.
The cost of the average Australian home has increased more than 18% over the past year – the fastest annual pace of growth since the late 1980s. The combination of continued low rates and house prices have been making regulators very worried. Apra’s Chair, Wayne Byres, adds that 22% of loans approved in the June quarter were more than six times the borrowers’ annual income. That’s up from 16% a year prior and it is concerning.
Next question you’re probably asking is, will APRA’s move take the heat out of the market?
Our view is that it will only make a fairly nominal reduction to borrowing capacity if one does not have any other debt (circa $25k reduction). It will have a greater impact to those who already have existing debt (particularly investors) who are then wishing to apply for more, as this higher rate will be applied to all existing debts as well.
APRA did consider limiting high debt-to-income borrowing (which was more expected by the market) but advised that it would be more operationally complex to deploy consistently. APRA has not ruled out limiting high debt-to-income borrowing in the future – possibly shot number 2.
There is almost a generation of borrowers now, who have never experienced a rate rise. Measures, such as that released by APRA, are also designed to make borrowers think twice before piling on household debt. This current measure may have somewhat of the desired effect, but probably only nominally so.
It is important to remember that there is no one size fits all, and that there is still a vast discrepancy in what each lender can lend.