The Australian Prudential Regulation Authority (APRA), has made a
simple, but significant change to the lending rules for banks and
other authorised lenders.
This could well lead to some unintended consequences.
From November, borrowers seeking housing finance will need to
demonstrate that they are able to meet repayments when interest rates are
assessed at least 3 percent higher than the actual loan interest rate applied
to their loan.
This assessed rate, also called the buffer, floor, or repayment
serviceability rate, was reduced to 2.5 percent above the standard variable
rate when it became apparent that we were not going into a recession as a
result of the pandemic.
The issue is that the provision of housing finance is a complicated
process because it needs to balance the risks to lenders of providing huge
amounts of money against the opportunities that housing finance provides to
home buyers and investors.
The history of broad-brush interventions in such
complex systems, no matter how well-intentioned, shows us that there will
always be some unanticipated and even undesirable results.
We may be about to see some of these unexpected
outcomes in the coming months.
Moving from lower to higher floor rates in just one
Before the recentAPRAchange, the low
floor rate was one of the main drivers of the housing boom, because it enabled
more first home buyers to enter the market.
At the same time, the lower floor rate has given
all property buyers, including upgraders and investors, access to higher
amounts of housing finance.
The lower floor rate had the same effect as a cut
in interest rates of about two percent, and in my blog, ‘The property market
stripped bare‘ in March this year, I predicted that this could lead to an
average rise in housing prices of 25 percent above pre-pandemic levels.
The increase in the floor rate will now reduce the
potential for housing prices to rise nationally by 20 percent over
pre-pandemic levels, which is where the market was poised as at the end of
This slowing down of buyer demand is the aim
ofAPRA’s change to the floor rate.
But what of the unintended consequences?
Existing homeowners will find it harder to
refinance or move
APRA’s change will tie many existing homeowners to
their current mortgages because their future loan repayment serviceability will
be assessed at the new, higher floor rate.
They will find it more difficult to "shop around”
for a better deal, use their equity for renovations, or even relocate in the
First home buyer demand will move, rather than
Many potential first home buyers will simply shift
their search for areas where housing prices are more affordable.
While this will reduce demand in the most expensive
first home buyer locations, it will also drive up demand in lower-priced
suburbs and more or less costly types of housing until the new floor rate borrowing
limits are reached.
So, rather than reducing overall home buyer demand,
the rise in the floor rate will merely push first home buyers into more
affordable locations and types of properties, while tying many existing
homeowners to their current mortgages.
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Wednesday, 20 October 2021