Have the lending floodgates re-opened?
In June the Australian Prudential and Regulation Authority (APRA) announced its first relaxation of credit controls imposed on the banks since its imposition of much tighter controls in 2017. These had been imposed to wind back a ramp in lending to property investors, to put a ceiling on interest-only lending, and to force the banks to more thoroughly consider individual borrower’s living expenses.
From APRA’s perspective, this has had the intended effect on the property market. The rampant growth in capital city property prices was controlled, and risks to the financial system implicit in highly geared investors, and even owner-occupiers holding interest-only loans in a property market “bubble”.
But as property market prices declined strongly and then the market stalled APRA has seen the need to once again provide some limited stimulus by allowing banks to reduce their floor lending assessment rates by up to 1.75% per annum.
So what does this mean for borrowers? Is the increased flow of finance likely to be a trickle or a flood?
I have made an analysis for both owner-occupiers and investors across a range of lenders. See Graphs 1 and 2 below.
Borrowing Capacity - Owner Occupiers
The trends which are apparent are:
That borrowing capacities have generally returned to their levels in April 2018
Borrowing capacity for both owner-occupiers and investors is only modestly increased (by about 5%) following the latest changes
Over the last 3 years, there has been a convergence of borrowing capacities across the major banks
The reduction in the mandated minimum lending floor assessment rate is partially offset by an increase in minimum living expense benchmarks used by lenders (known as HEM).
Borrowing Capacity - First Time Investors
Conclusions and Projections
I do not expect the changes allowed by APRA to have a substantial impact on the property market. For most borrowers, their maximum borrowing capacity will see perhaps a 5% increase. At a lending ratio of 80% this would support only a 4% higher purchasing power (and for many borrowers the increase will be smaller).
If interest rates decrease again there will be some further increases in borrowing capacity as lending assessment rates reach the new minimum floor level (at the moment the effect is attenuated by a 2.5% buffer being applied to the borrowing rate). Another rate reduction of 25bps would result in borrowing capacities being increased by up to 3% but then we will have effectively reached the new borrowing floor level.
The other interesting outcome is that as lenders’ calculators merge they are having to look at innovative ways to compete for business. We are seeing a much greater emphasis on rate for risk with many lenders adopting larger discounts for borrowings at 70% LVR or lower. And of course, there are common marketing ploys such as frequent flyer points offers and short term fixed rate specials. In the majority of cases these should be considered as background noise – you’re nearly always better off choosing a lender/loan with lower costs over the longer term.
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