Borrowers breathe as banks exhale!
If you’ve struggled to get a pre-approval/home loan for the amount you’d hoped lately, you probably blamed the bank. It’s frustrating, upsetting, alienating, unfair, infuriating… Since 2014, a high percentage of people have had their applications rejected. You might be surprised to learn that banks weren’t particularly happy about this either. The Australian Prudential Regulation Authority (APRA) was forcing them to go hard—they had to assess everybody on their ability to handle repayments if interest rates hit 7.00% p.a. But now, APRA has decided to loosen things up.
Turns out, APRA had unwittingly engineered a credit squeeze—the main driver of Australia’s property plunge. The iron laws of maths tell us — people turning up to auctions with less money will pay less money… So, now lenders have permission to set their own minimum rates, and then add a 2.5% rate rise ‘buffer’. For example; if you apply for a loan with an interest rate of 4%, banks must test your ability to pay at rates of 6.50% p.a. Scott Rundell, head of credit strategy at Commonwealth Bank, quipped, “We’d be very surprised if banks said ‘no thank you sir, we’re happy the way things are.’”
There’s a good chance of two rate cuts resulting in a 1.00% cash rate by year’s end. Riskwise Property Research reckons these numbers, plus APRA’s big relax will boost average borrowing capacity by up to 14%. So… Now I’ve cheered everyone up, can we toast marshmallows by the fire and sing kumbaya while property values rise?
CoreLogic — a font of great wisdom on such matters — says, “Nope.” According to their lead boffin Cameron Kusher, “given rates will probably only fall from here, it’s unlikely to boost house prices.” To paraphrase his further comments—it’s still harder to get a mortgage than before, and APRA’s move will stabilise house prices rather than flick on the growth switch.
All this aside, the current downturn may be slowing a tad. The surprise Liberal victory has buoyed investor confidence, which was seriously lacking in the face of Labor’s proposed changes to negative gearing and capital gains. Still, most commentators agree we shouldn’t get ahead of ourselves:
- Aussies are heavily in debt
- Melbourne and Sydney are still overvalued
- Banks are calculating living expenses super conservatively
- Errant presidential tweets and trade wars are fermenting global economic uncertainty
- Rental vacancy rates are really high
A million or so loans are set to switch from interest to ‘principle and interest’ over the next few years— which may shock a lot of people into forced sales and contracting the economy because people have less money to spend.
No matter what happens, there’s a bluebird on the shoulder of many home buyers now. Affordability is moving closer to reality and, the downturn continues. The time to buy could be near. If you’re now in the market, I’m sure I can help you get the most competitive deal that suits your needs. So, please reach out.