First-home buyers will be the big losers in the latest lending crackdown, Australia’s most famous mortgage broker fears.
With property prices across the country rising by a staggering 20 per cent a year, the Australian Prudential Regulation Authority is making banks assess if borrowers could cope with rising interest rates.
The banks are now offering mortgage rates of 2 per cent, but under the banking regulator’s new rules, lenders will have to determine if a prospective borrower could cope with mortgage rates rising by 3 percentage points to 5 per cent.
Someone borrowing $540,000 with a 20 per cent deposit to buy a typical Australian home, priced at $675,000, would owe the bank an extra $900 a month should rates rise to 5 per cent.
Aussie Home Loans founder John Symond (pictured with wife Amber) said the tougher rules would make it harder for first-home buyers to get mortgage approval
Winners and losers from loan crackdown
FIRST-HOME BUYERS: They will have a harder time getting loan approval from a bank as prices keep rising
INVESTORS: They will have more hurdles getting a loan to cash in on rising real estate values
EXISTING HOME OWNERS: Banks already required to stress test a 2.5 percentage point increase in mortgage rates and new rules will see that increased to 3 percentage points
This would be unlikely to cause house prices to drop if owner-occupiers continue to relocate for lifestyle
Aussie Home Loans founder John Symond said the tougher rules will make it harder for first-home buyers to get mortgage approval.
‘They will be the ones who I think are impacted – it will be first-home buyers but it will be others as well because people are borrowing a hell of a lot more money than previously,’ he told Daily Mail Australia.
National property prices in September soared by 20.3 per cent – the fastest annual growth pace since June 1989 – as wages increased by just 1.7 per cent, CoreLogic data showed.
The latest time Australian house prices surged at such a dramatic level, interest rates were at 17 per cent and within two years, the economy was in recession.
More than three decades later, official interest rates are at a record low of 0.1 per cent and property values are incredibly soaring despite immigration being turned off, which before the pandemic had caused the populations of Sydney and Melbourne to each boom by 100,000 people a year.
Unlike previous booms, house price increases aren’t restricted to Australia’s biggest cities with the ability to work from home thanks to WiFi – boosting real estate values in coastal areas from Coffs Harbour to the Gold Coast.
Australia’s median house and unit price now stands at $674,848, which means someone earning an average, full-time salary of $90,329 would have a debt-to-income ratio of six.
With property prices across the country rising by 20 per cent a year, the fastest pace in 32 years, the Australian Prudential Regulation Authority will make the banks assess if borrowers could cope with interest rates rising by 3 percentage points (pictured is a stock image)
Australian annual house price surges
SYDNEY: Up 28.9 per cent to $1,311,641
MELBOURNE: Up 18 per cent to $962,250
BRISBANE: Up 22.2 per cent to $709,136
ADELAIDE: Up 21.4 per cent to $575,949
PERTH: Up 18.5 per cent to $548,351
HOBART: Up 25.8 per cent to $704,321
DARWIN: Up 18.5 per cent to $563,357
CANBERRA: Up 28 per cent to $956,119
Source: CoreLogic Home Value Index median house price data annual increases in September 2021
APRA considers six to be a dangerous level where a borrower would struggle to meet their monthly mortgage obligations after paying their other bills and living expenses.
Mr Symond, who retired last year from running Aussie Home Loans, said the banking regulator’s changes would have little effect on property prices because under existing rules, the banks already have to assess the ability of a borrower to cope with a 2.5 percentage point increase in mortgage rates.
The new rules take that mortgage stress test to 3 percentage points.
Instead of making homes more affordable, younger prospective buyers will miss out as older property owners benefit from rising real estate values.
‘It will knock out a lot of people who are close to getting through the serviceability test,’ Mr Symond said.
‘The banks currently add two-and-a-half per cent to whatever product they’re giving you so if you’re getting a home loan at 2.5 per cent, the banks assess your credit as if the rate was 5 per cent to make sure that you qualify and you can pay at 5 per cent.
‘APRA’s come up and said: ‘Push it to 3 per cent above the rate so it’s marginal.’
An Australian earning $90,329 – paying off a $674,874 home with a 20 per cent deposit factored in – would now owe the bank $2,048 a month in mortgage repayments.
That is based on this borrower having a Commonwealth Bank loan with a 2.19 per cent three-year fixed mortgage rate.
During the past year, Sydney’s median house price climbed by 28.9 per cent to $1.312million. That is beyond the reach of an average salary earner, who would have a debt-to-income ratio of 11.6 paying off a $1.049million mortgage with a 20 per cent deposit (pictured is a house on the market at Toongabbie in the western suburbs)
Under the APRA changes, the banks would have to model how this borrower paying off $539,878 in debt would cope with the mortgage rate going up to 5.19 per cent, which would see their monthly repayments climb to $2,962 or by an extra $914 a month.
The Reserve Bank of Australia predicted the APRA rule changes would take several months to have an effect on debt levels.
‘The maximum impact of this policy change could take several months to be realised,’ it said on Friday in a financial stability review report.
‘It may take some lenders several weeks to adjust to the new settings and some households will have already planned or committed to purchase based on previous lending policies.’
Reserve Bank governor Philip Lowe has vowed to keep interest rates on hold until 2024, to keep unemployment low, but the RBA has admitted a debt bubble was a risk.
‘Low interest rates have contributed to high prices for financial assets and housing.
‘There has been some increased risk-taking and higher borrowing,’ it said.
KPMG chief economist Brendan Rynne said this was ironic considering Dr Lowe last month declared that raising the cash rate to cool an overheating housing market was ‘not on our agenda’.
‘It does seem ironic that the RBA is warning of excessive borrowing, given that it is the highly accommodative monetary policy setting that is driving it,’ Dr Rynne said.
‘Both the ultra-low cash rate and the extraordinary monetary stimulus provided by the RBA has generated asset price inflation, which is tempting people into the market, who are keen not to miss out.’
The Reserve Bank of Australia predicted the APRA rule changes would take several months to have an effect on debt levels (pictured is a house on the market at Strathfield in Sydney’s inner west)
During the past year, Sydney’s median house price climbed by 28.9 per cent to $1.312million.
That is beyond the reach of an average salary earner, who would have a debt-to-income ratio of 11.6 paying off a $1.049million mortgage with a 20 per cent deposit.
Mr Symond said house prices were likely to keep rising, albeit at a slower pace, until mortgage rates increased from 2 per cent now to 4 per cent in coming years.
He predicted Sydney and Melbourne house prices could then fall by 5 to 7 per cent when this eventually occurred.
During the last APRA crackdown in 2017, Sydney property prices fell by 15.3 per cent over two years, back to $880,000, as interest-only and investor loans were targeted, following a 68 per cent rise in values over five years.
The property market’s recovery was interrupted during the 2020 Covid lockdowns only for prices to surge again after the Reserve Bank of Australia cut the cash rate to a record low of 0.1 per cent and gave $188billion to the banks to provide cheap loans.
In 2021, owner-occupiers instead of investors are dominating the market as new working-from-home rules encourage professionals to buy houses in more attractive suburbs in the big cities or move to regional areas.
CoreLogic head of research, Eliza Owen, said the APRA changes would be far from the last with housing debt growth far outpacing wage rises.
‘While APRA’s announcement may seem like it won’t have much impact on demand for credit, it is worth noting that this may not be the end of macro-prudential changes,’ she said.
Ms Owen said the APRA changes were more likely to affect demand for investor mortgages instead of owner-occupier loans.
‘Investors tend to be more leveraged in their borrowing behaviour and may be carrying additional housing debt which would also be subject to the increased serviceability assessment,’ she said.