08/10/2021
Wondering what the property market may do next? Here is what we think.
New lending laws to reduce the amount you can borrow but will they slow market growth?
In an attempt to cool the jets of Australia’s hot property market, the Australian Prudential Regulation Authority (APRA) advised banks this week to increase their borrower’s risk rate calculation by 0.5%, slightly reducing the amount buyers can borrow. This comes after Core Logic’s national home value index reported that Australian housing values have increased 20.3% over the last 12 months, the fastest pace since year ending June 1989.
As a general guide, the APRA change means that the owner occupiers, paying principal and interest over a 30-year loan term need to provide an extra $31 per month (approx.) in debt servicing income for every $100K they borrow (or approx. $310 per month for every $1M they borrow).
For another perspective, the graph prepared by Canstar, shows the impact of the recent changes when applying for a home loan.
Although this change does not affect the actual home loan interest rates, it will impact the amount borrowers can qualify to lend from the bank.
APRA expects a modest impact on housing credit growth with this change. APRA chair, Wayne Byres, said the regulator was focused on making sure banks were lending to borrowers who could afford the debt they were taking on, now and in the future. While economists expect the move to reduce the pace of property price growth, but not by much for now.
History shows us that if property prices continue to increase at a pace that greatly outweighs income growth, we may see banks increase home loan interest rates, even if the Reserve Bank does not change the cash rate. We may also see loan to value lending ratios lower, which mean a bank will lend a borrower less against the value of the home. This means you will need more of a deposit to buy than you do currently.
The announcement this week by APRA is a warning that they will take steps where and when necessary to cool the overheated property market, and we don’t believe we have seen the last of it yet.
How does this affect property prices going forward?
For now, we believe very little, if at all. AAA property location may still see growth in the coming months. This is because the APRA changes will not immediately impact high demand suburbs and its property buyer demographic, due to a great income average. The current focus by APRA is specifically targeting highly geared borrowers and their exposure to the debt increasing faster than wage growth.
History shows that monetary policy intervention can slow and reduce property prices and demand. Back in 2017 we personally witnessed, within weeks, the property market pulling back and the increase of unsold stock accumulating, reducing demand and buyer confidence in the market.
Interestingly, AMP Capital Chief Economist, Dr Shane Oliver, said that investors could be most affected by the change because they have higher interest rates, but warned that first home buyers could be “on their heels” as they would have to “invariably stretch further in this hot market given where prices are.”
But Dr Oliver also said this week, “Given its impact is likely to be modest… we will stick to our expectations for average house price growth to slow to 7.0% next year from around 20.0% this year.” Similarly, CBA’s head of Australian economics, Gareth Aird, said that he does not believe that the 50-bps increase on the minimum interest rate buffer would materially shift the property price outlook in 2022. He also forecasts a further 7.0% rise in national dwelling prices in 2022.
So, what should you be aware of if you’re trying to buy a property right now?
1. Revisit your borrowing power. Speak to your broker or bank to find out if the APRA policy adjustment impacts you.
2. If recent sale results have priced you out of a particular location, don’t expect that suburb/town to drop in price anytime soon. It may even rise a little more.
3. If the market starts to decline, ‘A’ grade owners, who typically own ‘A’ grade property, may simply delay going to market and/or refinance to keep the property until the market starts to rebound.
4. Properties that drop in value when the market slows, normally are the ones you don’t (or shouldn’t) buy anyway. ‘B’ and ‘C’ grade properties struggle to sell the most when the market slows.
5. Buy what you can afford to keep. Make sure you have aligned your property location with your budget capacity. You should also ensure you have a sufficient cash buffer on hand if interest rates start to increase (and they will).
6. Review the compromises you are prepared to make in a property purchase if you are constantly missing out and/or everything is selling above what you can comfortably afford. Consider pushing out to the next suburb to buy better long real estate.
Sadly, for buyers, we don’t think the market is changing downward anytime soon, but if history is a guide, it will definitely continue to have its cyclical ups and downs. To find out more, contact us for a chat.
- Max Waller, CEO, Provincial Group
