Is Australia looking at a property lending crackdown?
“Financial regulators are set to step into Australia’s red hot real estate market, ANZ warns.”
“The bank’s economics team expect a lending crackdown in the next few months as the Reserve Bank becomes increasingly concerned with lending growth.”
But what does this mean? Well, this week we are going to take a deeper dive into what a property lending crackdown might involve and how it may impact us.
You’d have to be living in a hole to not be aware that in recent times property prices have been rising well above expectations across all property markets in Australia. But you might be surprised to learn that $1 billion a day is flowing into the property sector!
This enormous growth has seen Melbourne and Canberra join Sydney in the $1 million-plus median house price club in recent months.
Lets open this up, and get an understanding of it. One of the key things that push up property prices is how much people are willing to pay. A couple of things that influence how much people are willing to pay is how much money they can borrow, and the cost of borrowing that money.
Interest rates in Australia are at a record low. The Reserve Bank of Australia (RBA) lowers interest rates in order to stimulate growth during a period of economic decline, as low interest rates means as consumers we have more spending money. Lowering interest rates means the cost of borrowing money becomes more affordable and the RBA is hoping we will spend that money to aid economic recovery.
We will have in-depth look into the pros and cons of low interest rates at a later date, but right now we can all agree that the RBA is encouraging us to spend money in an attempt to address the impact that COVID-19 has had upon the economy.
Two key things is that lower interest rates encourages first home buyers as they see it as an opportunity to enter the property market, and existing home buyers see lower interest rates as an opportunity to remortgage – using the extra money in their pockets to upgrade, renovate or spend on improving their lifestyle – such as a new car.
Yet, the current house prices is making it unaffordable for first home buyers who are struggling to save enough even for a deposit.
So who is the Reserve Bank of Australia? We’ve all heard of them but we have never seen a RBA Branch or ATM machine.
Well, the RBA doesn’t have a branch, and doesn’t act like other banks. It is owned by the Australian Government and is also known as Australia’s central bank. The role of a country’s central bank is to carry out the country’s monetary policy (such as set the interest rates) and issue currency.
The man currently in charge of the Reserve Bank of Australia is the RBA boss Governor Philip Lowe.
Governor Philip Lowe has previously stated that it is likely interest rates will maintain their current 0.1 per cent level for three years.
If that’s the case , then that begs the question “how will the regulators cool Australia’s red hot real estate market?”
Well that question has already been asked…and answered, across the Tasman.
Our friends, the Kiwi’s experienced a 20% increase in property prices in 2020. This raised affordability concerns and their central bank (the Reserve Bank of New Zealand) is working with the country’s banks to tighten mortgage lending standards.
The New Zealand government recently agreed, in principle, to apply restrictions to what people can borrow and reduce the impact of investors on house prices, whilst supporting first homebuyers to affordably enter the market.
It is specifically focusing on Loan-to Value ratios (LVRs) and/or debt -to-income ratios (DTIs) along with interest rate floors in mortgage srviceability tests. We will take a deeper look into these terms at a later point, but briefly it means that effectively it will become harder for people to borrow money as the amount of money that may approved for lending has more tests applied to it.
Why would the government have an issue with rising house prices?
A word that we have all become more familiar with during COVID-19 is bubble. In the property market a bubble is an increase in housing prices fueled by demand, speculation, and exuberent spending to the point of collapse. At some point there’s a correction, demand stagnates at the same time supply increases, resulting in a sharp drop in house prices – that’s what they call the bubble bursting.
Whether the Australian property market is already in a bubble is a matter of opinion. What I do know is that, at a value of $8.1 trillion, the property market is responsible for the majority of the nation’s wealth.
I also know that Australian household debt is amongst the highest in the world. Household spend-to-income ratio is above 212%. What this means is if your household earns $100,000 net a year, the amount of spending is over $212,000 per year – and that can’t be sustainable by any calculation.
Right now property prices are growing ten times faster than wages. If property prices are increasing at a greater rate than our earnings, then the only way we can acquire property is to increase the amount of debt we hold. This is where things become uncomfortable, and this is where people can get hurt.
“It’s not in the country’s long term interest to have debt increasing at a much higher rate than their incomes,” Governor Philip Lowe
Fine tuning a gentle slow down in property prices is the best way to avoid a bubble bursting, and people getting hurt. How would the RBA do that?
So whats the solution?
RBA Governor Philip Lowe has discussed the following five different types of ledning restrictions regulators are considering to reduce the rising house prices and levels of debt.
The first is increasing the buffer zone on loans. Currently lenders can only approve loans where the borrower could afford repayments if the mortgage rate rose by 2.5 percentage points. Increasing this would give borrowers more breathing room should rates start to increase.
The second is placing restrictions on borrowers who try to borrow large amounts of money with a minimal deposit, called a high loan to value ratio (LVR). Generally considered higher risk, limiting the proportion of these buyers would help take some heat out of the market.
Thirdly, restricting high debt to income (DTI) loans. In other words, the RBA would shut out those borrowing to their absolute limit, although Lowe indicated Australians rarely borrow every cent they can.
Fourthly, investors may be restricted or shut out. Our friends over the ditch have looked at a requiring a minimum 40% deposit for investment loans – reducing the number of investors in the market.
Fifth, the number of interest-only loans could be restricted.
With these tools on the table, it would seem that more than one could be introduced in an effort to crackdown on property lending and cool the red hot property market.