On Wednesday 6^th October 2021, the Australian Prudential Regulation Authority (APRA) announced to lenders that it had requested banks increase their serviceability buffers. While at face value this may seem a stable decision, it has left many of our clients here at Kitty & Miles concerned about the effects this request may have on them.

What this announcement means is that authorised deposit-taking institutions will be expected to assess a new borrower’s capacity to meet their loan repayments at a higher interest rate – and one that is at least 3 per cent above the loan product rate. While this may not look too bad on paper, ultimately, this is a 0.5 per cent increase on the previous buffer, or at the floor rate of 5.09 per cent – whichever works out higher. And this can mean you’re out of pocket far more than you’d like when you enter the property market.

Due to continually rising property prices and an increasing disconnect with affordability, there has been much talk of tighter lending restrictions recently. Since APRA’s announcement earlier this week, plenty of people from various groups have chimed in to discuss how the increased buffer may influence and control property purchasers decisions to buy in the near future.

An investor’s perspective

Eliza Owen – the head of research for CoreLogic feels the increased buffer was a subtle way to improve financial stability in the market, though she believes investors will be impacted the most due to many owner/occupier mortgage rates being lower than investor rates.

Owen points out that while investors typically have more leverage in the amount they are able to borrow and how they use it, they may also have additional housing debt that would then be subject to the increased serviceability assessment.

A first homebuyer’s perspective

But what about the buyers who have saved tirelessly for a deposit year upon year to enter the property market?

Housing Industry Association (HIA) believes this increased buffer will be most detrimental to first homebuyers, as they will be the ones to directly suffer the consequences of the changed borrowing conditions. And they’re not wrong.

Tim Reardon – chief economist at HIA noted that renters looking to jump ship and buy a property of their own may find it even harder to attain a property based on the new buffer. He points out that over 90% of renters plan to buy a home of their own one day, but close to half feel that realistically, the goal is actually impossible to achieve.

Generally speaking, first homebuyers are constrained by serviceability thresholds and as a result, are the most likely to be negatively affected by the changes announced by APRA earlier this week.

Reardon also states that limiting new households’ access to credit as they try to enter the housing market will lead to a continued decrease on the rate of home ownership in Australia – which will have knock-on effects on the economy.

With financial regulations having been put in place since 2010, Reardon identifies that APRA has now made it harder for first homebuyers to enter the property buying market, and isolates Australia’s strong financial sector and “low levels of mortgage delinquency” as reasons why APRA should not have increased the serviceability buffer.

How does this affect the Australian economy?

Now that the Property Council of Australia (PCA) has publicly stated that it understands APRA’s reasoning to increase interest buffers on home loan applications, the PCA also demands that the impacts be observed into the new year before any further action is taken to tighten lending even further.

Ken Morrison – PCA chief executive says it is vital that these measures not affect the broader market confidence – especially during our economic recovery here in Australia because the increased buffer has come at a poor time.

With fiscal stimulus and the HomeBuilder effect retracting from the economy, our two largest states yet to successfully transition out of lockdown, and our overseas migration still in the negative, Morrison believes APRA’s decision is one that has taken our once prosperous economy for granted.

Morrison makes a good point in that the strong housing construction industry has been the backbone of our economic resilience as a country over the last 18 months – especially with more jobs per dollar spent than any other industry. And it is because of this that he rightly urges the government and the regulator to remain focussed on the impacts of these changes into the new year so we can target their communications in the right way.

Realistically, we can expect more changes on the horizon. With APRA’s chair Wayne Byres announcing to APRA’s lenders that the organisation “would consider the need for further macro-prudential measures” if new mortgage lending on high debt-to-income ratios remained at high levels, we should be ready to receive news of further tightening of lending conditions while the Council of Financial Regulators continues to oversee trends in housing credit and household debt.

The past 18 months may have been a true rollercoaster of emotions (and finances!) for first homebuyers and owners looking to sell, but stay tuned my lovely friends. We’ll keep you up-to-date on further changes as they occur and help to put a plan in place for your next step in the property market.