Measures to cool the boiling real estate market are blocking first-time homebuyers
This is APRA’s strongest move to date to ease the risks created by a debt-fueled real estate windfall that has seen domestic house prices soar by more than 20% over the past decade. last year, according to data from CoreLogic. Another sign of the boom, CoreLogic said this week that the value of Australian real estate assets had risen from $ 1,000 billion to $ 9 trillion in the past five months.
Ultra-low interest rates have been one of the main drivers of the boom. Last year, the Reserve Bank cut official rates to just 0.1% and launched a series of “unconventional” policies that cut rates on fixed-rate loans in an attempt to spur economic growth during the pandemic, which triggered Australia’s first recession in nearly three decades.
Since the RBA began cutting official interest rates in mid-2019, the average new mortgage loan to buy an established New South Wales home has swelled 36% to $ 775,000, and in Victoria, it jumped by a third to $ 634,000.
Van Deyk understands concerns over growing indebtedness, but fears the move will make it more difficult for people in his situation to buy their first home at a time when the market is running low on available stock.
In Melbourne’s Ringwood suburb, another potential first-time buyer, Cazna King, 25, is also disheartened by the change. She and her partner are not looking to borrow the maximum amount, so they are unlikely to be directly affected by this week’s crunch. Still, she believes the changes present another challenge for first-time homebuyers, and she doesn’t think they will cool the boiling market.
“I don’t think it will make a difference,” King says. “There are not enough places on the market and there is more interest from buyers.
These concerns of first-time homebuyers are a sign of the strains and limitations inherent in using credit restrictions to ease the booming real estate market a bit.
In a homeowner-driven boom, there is always a risk that an intervention to cool the market will affect those in this group who are most exhausted – many of whom are first-time buyers.
But at the same time, the whole purpose of such regulatory tightening – called “macroprudential” policy – is to curb a market that is showing signs of overheating. Raising interest rates – the other weapons authorities could use to slow the boom – would hurt other sectors of the economy, and the RBA has said it does not plan to hike rates until. 2024.
As a result, most experts believe this is just the start of the regulator’s attempts to intervene in the housing market.
Banks have generally backed the move, and APRA says the changes are likely to have a bigger effect on investors than homeowners, as investors tend to be more in debt.
At an individual level, however, the new rules will affect anyone looking to borrow to their limit – whether they are a first-time buyer, an investor, or someone refinancing.
RateCity’s research director Sally Tindall says the new rules are likely to cause many buyers to scramble to determine how much their bank will lend them. “The changes are designed to protect people against risky debt levels, however, it will hurt first-time homebuyers who typically have lower incomes and lower deposits,” Tindall said.
Banks have until the end of the month to change their appraisal rates in line with APRA’s demands, and the industry will closely monitor the effect of the changes on property sales and new loans.
When APRA restricted lending to real estate investors and only interest rate borrowers in late 2014 and 2017, this had big implications for the market, as banks responded by raising interest rates for these groups. of customers.
Will this intervention also have profound impacts on a market that was already showing signs of slowing down in recent months? Or will it take more action?
APRA said the impact would be “modest” and stressed that it was not trying to dictate house prices. But house prices are inextricably linked with real estate debt, and bankers believe APRA is trying to stage some kind of smooth slowdown.
The dilemma APRA and the Reserve Bank face, however, is that a sharp drop in prices could quickly hurt consumer confidence and hurt the high-employment construction sector.
Real estate groups have asked APRA this week to be cautious and carefully assess the impact of its changes before taking further action.
The Housing Industry Association warned that increasing interest rate cushions would make it even more difficult for first-time homebuyers to enter the market, and pointed out that banks’ bad loans were unusually low, suggesting households managed their debts.
Velocity Trade analyst Brett Le Mesurier says rising fixed interest rates have already slowed house price growth in recent months, and the regulator’s “minor” intervention will add to this. tendency. He does not expect that further APRA measures will be needed to dampen the market.
“I suspect the market is already starting to cool – I think this will only help,” says Le Mesurier.
In a note titled “No Baby,” Macquarie analysts say it is possible that APRA’s intervention would have the desired effect, if it weakened buyer confidence and the pace of price growth.
For the most part, however, analysts and even some bankers suggest that more stringent measures would be needed in the future.
CBA chief executive Matt Comyn, who said last month he was “increasingly concerned” about rising house prices and real estate debt, said APRA’s changes are expected to ease the market, but have signaled that further tightening may be ahead.
“We will be implementing the changes this month and expect there will be a need to consider additional measures as the lockdowns end and consumer confidence increases,” Comyn said this week.
“House prices could well go down. Could it be a disaster? Everyone around the royal commission said we would see an absolute disaster when house prices fell. Did we see a disaster then?
Jeffries analyst Brian Johnson
The APRA changes are unlikely to have much of an effect on credit growth or bank profits, analysts say, even if the intervention caused bank stock prices to fall, Commonwealth Bank shares losing 2% on Wednesday. But APRA’s move sparked predictions that any further tightening could have a bigger impact on the mortgage and real estate markets.
Jefferies analyst Brian Johnson says the measures announced this week aren’t a big change in themselves, but they are an indication of further restrictions on the horizon. “This is the start,” he said.
Specifically, he discusses future restrictions on new loans to clients borrowing a high multiple of their income, and restrictions on loans with high loan-to-value ratios. Figures last month showed more than one in five new loans went to customers borrowing more than six times their income – a proportion Johnson describes as “crazy high.”
Longer term, he says the cumulative effect of this week’s change and others to come could push home prices down. But given the huge rise in house prices to date and past experience with housing price declines such as the 2017 and 2018 price cuts, it suggests that a future price drop wouldn’t be a major problem.
“House prices may well go down. Could it be a disaster? Everyone around the royal commission said we would see an absolute disaster when house prices fell. Did we see a disaster then? he says.
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