Is the Financial Regulator about to tighten home lending rules?

As every man, woman and child is aware, the Australian housing market is white-hot right now. Compounded by a variety of factors, the reality is that across Australia, house prices have been consistently rising since the beginning of the lockdown (and before!).

Indeed, according to CoreLogic, the average Australian home has seen its value climb over 18 per cent in the past year alone, with some cities and many regional areas seeing even larger price increases! It could be worse. You only have to look to our neighbours in New Zealand, who have experienced an eye-watering 26 per cent increase in the same year. Not only that, but the Kiwis already had one of the most expensive housing markets in the world!

The Financial Implications of Real Estate Price Surges

Whilst traditionally the trajectory of real estate value tends to go upwards, it is the combined rate and sustained nature of this rise (in the absence of any strong supporting economics) that has the government increasingly concerned. Without going into the microeconomics, the current reality is that in order to stand a chance of acquiring a home, homebuyers have been forced to borrow more. As house price increases far outpace increases in average household incomes, people are more indebted and therefore more vulnerable to default, especially if they lose work or interest rates go up.

What does the Government think?

Treasurer Josh Frydenberg commented last week "We must be mindful of the balance between credit and income growth to prevent the build-up of future risks in the financial system”.

New Zealand has had an average 26% house price increase in the last 12 months. Photo of Queenstown by Kate Antamanova on Unsplash

What can the government and regulators do?

At this stage, it all falls into the remit of The Australian Prudential Regulation Authority (APRA), an 'independent statutory authority that supervises institutions across banking, insurance promotes financial system stability in Australia'.

Basically, APRA determines the rules for lenders, such as how much they can loan and to whom they can loan it too. In the last Australian housing boom from 2013-17, APRA targeted the investor market and capped loan amounts. They also ensured that loan applicants had to have a greater buffer ensuring they could absorb any interest rate increases.

Will they do the same this time?

According to CoreLogic research, most of the growth that we have seen recently has not come from investors but a larger proportion of owner-occupiers. This means that in order to ensure long term financial stability, it is likely that APRA will instead opt to target the debt-to-income ratio of this demographic.

Will changes to lending rules affect house prices?

It is hard to say. Tightening lending standards and focusing on debt to loan ratios will mean that there are some that simply won’t get a home loan, and therefore demand could fall. It is worth noting that it is not the intention of the government, APRA or anybody else to bring down or cool house prices. The primary concern is the risk associated with debt ratio levels as these directly affect household spending, which in turn directly affects the economy. Why? Because people who are struggling to pay the mortgage spend less, and this has a negative affect on the economy. Longer-term, high debt levels make the population more vulnerable to incoming economic shocks and interest increases.

When will the regulator likely take action? 

It is almost certain that there will be a number of macroprudential rules applied before the end of 2021, and that these in one way or another tighten the rules around lending. It is impossible to say what this will do to the current housing price surge, but it’s likely not to be monumental. Demand is not going to evaporate and with increasing vaccination rates following long lockdowns, economists are looking forward to a 2022 economic ‘bounce back’ which could fuel confidence again. You could argue that like a locomotive, the Australian real estate market is likely to need some time to slow and is hugely unlikely to derail any time soon.

But will it be more difficult to get a loan? You betcha.

Written by Ben Saravia,  

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