Borrowers will face tougher serviceability tests when applying for a new home loan after new requirements were announced by the Australian Prudential Regulation Authority this week.
Under the changes, borrowers will need to demonstrate to a lender that they are capable of making repayments even if interest rates rise by 3 per cent or more above the rate of the product they are applying for.
This is an increase on the 2.5 per cent rate currently used by most lenders when assessing applications.
The changes have been the subject of intense speculation in recent weeks as the Council of Financial Regulators and the Federal Treasurer, Josh Frydenbeg expressed concerns about the level of debt being taken on by owner occupiers.
Around one in six owner-occupier loans made out in the June quarter had a debt-to-income ratio greater than six.
Previous interventions in the housing market by APRA have preceded declines in house prices, leading to speculation that a toughening of lending standards may take some of the heat out of the current boom in prices.
“Any tightening of credit policies would likely have an immediate dampening effect on housing markets, the extent to which would depend on the scope and severity of the tighter credit conditions,” said Tim Lawless, CoreLogic’s research director, commenting before the changes were announced.
“Through previous rounds of macro-prudential policies and the Banking Royal Commission, which saw housing credit harder to come by, the impact on housing activity and value growth was clear,” he added.
“Ultimately, stricter credit conditions, should they be introduced, would flow through to less home purchasing activity and add to the headwinds of worsening housing affordability, higher levels of newly built supply and stalled overseas migration,” he added.
The impact of the lending changes will likely vary throughout the Melbourne market, according to Woodards agents.
“I don’t believe in South Yarra or Toorak that it’s going to make any difference,” said Woodards South Yarra, senior sales consultant, Philippe Batters.
“Personally I think it’s a good thing. A lot of people who’ve taken out loans to the maximum of their ability are going to be in a very dangerous position if those rates change,” he said.
He predicted that banks would further tighten lending criteria next year as part of the economic recovery and the end of pandemic-related business support.
Woodards Ascot Vale director Sam Abboud said that it remained to be seen what impact the changes would have in his market.
“I haven’t got into detail about it but I haven’t had a single buyer mention anything about it yet so it’ll be interesting to see over the coming months,” he said.
However, there had been signs that buyers were going to “extraordinary lengths” to secure larger family homes, pushing prices higher.
Evidence of the strain this was placing on buyers was apparent in the number of buyers selling their current property when upgrading, rather than retaining it as an investment property, Mr Abboud said.
Melbourne prices up 15 per cent in past year
Melbourne’s median dwelling price is up 15 per cent in the year ending September 30, according to the latest CoreLogic figures.
That figure is more subdued than growth in other cities, including Sydney, where prices were up 23.6 per cent.
Canberra and Hobart were the standout capital city markets, with prices up 24.4 per cent and 26.8 per cent respectively.
Melbourne recorded price growth of 0.8 per cent over the month of September and 3.3 per cent over the quarter.
Mr Batters said that houses had generally been doing well in the South Yarra market in September, but expected apartment price growth to improve with the return of overseas migration, particularly international students, which would reinvigorate the investment market.
“I think the property that is going to prosper the most in the remainder of 2021 is anything with a land component,” he said.
“We’re finding the houses are going better than the flats. The flats that are doing well are the really good apartments, not necessarily expensive but in a good location, in well-located buildings that are near a railway station,” he said.
Mr Abboud said that the amount of price growth for the remainder of 2021 would be dependent upon stock levels.
“It all comes back down to stock levels. We've had a fair bit of stock hit the market post lockdown now we can get photographers back out there so there are a fair few listings gone to market. If that rush of the properties continues to hit the internet it’ll likely soften the market but if it dries up again prices will be reinforced,” he said.
More heat expected as lockdowns eased
35 per cent of Australians expect house prices to heat even further when COVID-related restrictions in major markets like Melbourne lift.
22 per cent of respondents thought the market would cool, while 43 per cent were undecided, according to the survey of 1000 respondents conducted by comparison site Canstar.
“Australians who expect further heat to come to the property market once vaccination targets are met outnumber those expecting a cooling by 1.6 to 1.0. Encouraged by their expectation of higher prices, people are also planning to race into the market, with six percent saying that their first major spend once lockdowns lift will be on property,” Steve Mickenbecker, Canstar’s Group Executive, Financial Services, said.
The survey also found that 4 per cent of respondents planned on buying a home and 2 per cent an investment property once vaccination rates reached 70 to 80 per cent.
“A late spring housing boom might still be ahead of us, with vendors perhaps taking advantage of expected buyer demand, bringing increased stock to the market,” Mr Mickenbecker said.
Rates on hold
The Reserve Bank of Australia resolved to keep rates at their current record low of 0.1 per cent at their October meeting, but economists predict that the major banks will continue with out-of-cycle rate rises regardless.
Half of 28 economists surveyed by comparison website Finder prior to the RBA’s latest announcement indicated that it is likely that the major banks will lift their standard lending rates out of cycle within the next 12 months.
“Data from the RBA shows that banks changed their rates 7 times during the last stable period. 4 of those changes were rate increases – and they may well do it again,” Graham Cooke, head of consumer research at Finder, said.
“Those who aren’t on a fixed mortgage rate should stay alert to any changes from their bank, as it could mean substantially higher monthly repayments,” Mr Cooke added.
Rise of the rentvestor?
The Australian Bureau of Statistics has released its latest lending figures, with a dip in new loans coinciding with the protracted lockdowns in Melbourne and Sydney.
New housing lending dropped by 4.3 per cent from July, the biggest decrease since May 2020. Owner occupied loans fell by 6.6 per cent in August.
In a recent update CoreLogic’s Tim Lawless commented that the drop in owner-occupier loans was particularly pronounced in the first home buyer category.
“The slowdown in first home buyers can be seen in the lending data, where the number of owner occupier first home buyer loans has fallen by 20.5 per cent between January and July,” he said.
But there were signs that first home buyers were still active in the housing market.
“Over the same period, the number of first home buyers taking out an investment housing loan has increased, albeit from a low base, by 45 per cent, suggesting more first home buyers are choosing to ‘rent vest’ as a way of getting their foot in the door,” Mr Lawless said.
Mr Abboud said that while the national figures may show a trend toward investing, first home buyers in his Ascot Vale market overwhelmingly intended to occupy their new property.
“Not a great deal most of them want to move in straight away. Most of the sale to owner occupiers rather than investors - we haven’t seen a huge upswing in first-home buyers investing, most want to move in straight away,” he said.