The Australian Prudential Regulation Authority (APRA) has written to banks indicating that the 7 per cent serviceability buffer on home loans be removed. The move has been lauded by both borrowers and lenders and is a very positive sign for the property market.
In December 2014 APRA introduced a 7 per cent interest rate threshold on all home loan applications in a bid to quell the early signs of what ended up being a very strong period for the housing market on the East Coast of Australia.
The property price surge continued all the way into mid-2017, where APRA continued to clamp down on various lending practices but was led by the 7.25% rate of principle and interest (0.25% is from the banks) that borrowers were required to be able to service when being assessed on a new loan.
There is no doubt APRA’s macroprudential measures have added to the current slowdown in property prices and we are now at a point in the property cycle where it appears to be a prudent move to drop the 7.25% buffer that has been stifling new investment from coming back into the sector.
As it stands, removing the buffer, would likely lower the effective rate borrowers are required to meet to about 6.5 per cent. That will potentially give first home buyers around an extra $50,000 on average to spend on their investment and make it far easier to obtain credit.
What also makes this an interesting proposition to consider is the fact that the RBA’s official cash rate has remained unchanged for more than two years, with plenty of speculation that the next move can only be down.
During the big run-up in property prices, the RBA was unwilling (or unable) to raise rates to slow a rampant East Coast market. Instead, APRA took the lead and targeted access to credit as the most effective way to bring the market back into line.
So for the time being it is APRA that is once again pulling the strings by loosening the reins and allowing softer lending standards.
RBA Cuts on the Cards
As it stands currently, money markets and most economists are still pricing in multiple rate cuts in 2019, which could potentially see the cash rate fall to as low as 1%. At the time of writing, we are seeing an 70-80% chance of an interest rate cut in June.
At the last meeting of the RBA, those odds were closer to 50% and the members decided to keep rates on hold. Since that point in time, a jump in the unemployment rate to 5.2% from 5.0% has increased those odds, based on the guidelines the RBA had laid out for any potential move lower. RBA Governor Phillip Lowe has also flagged that interest rates will likely be cut next month as recently as this week.
It has also been suggested that now APRA has lowered the 7.25% buffer, then that might very well buy some more time for the RBA to keep rates on hold, which it appears Governor Lowe would prefer to do if he had his way.
On the back of the shock election win by the Coalition, there is also some hope that the housing market might even get another positive boost, as Labor had been proposing a raft of measure including the scrapping of tax breaks for investors such negative gearing on established homes, which will now clearly not be going ahead in any form.
The reality is that in the current climate, rates are not likely to see 7.25% in the near future. So clearly there is no need for banks to be required to assess potential borrows at such an unrealistic benchmark. Recently ANZ chief executive Shayne Elliott stated that APRA’s current policy forces ANZ to reject one in five home-loan applications, which is far higher than the bank might like.
Broadly speaking, reducing the buffer to 6.5%-6.75% from 7.25%, would allow home buyers to increase their borrowing capacity by around 5% and would give a lift to markets in need of new buyers.
So as both an alternative to a rate cut or in addition to one, a reduction to the minimum rate buffer appears to be a huge step forward for property markets.
The next meeting of the RBA will be on June 4 and we could find ourselves in a situation where interest rates will cut by at least 25 basis points and APRA’s minimum buffer rate will likely be gone.
It certainly looks like June could be shaping up as positive one for both home buyers and the property market.
