Recently, the Australian Prudential Regulation Authority (APRA) announced it would be placing lending restrictions on interest-only loans. Typically used by investors, interest-only loans increase cash flow. However, economists warn that these changes to lending may see home prices drop in Sydney and Melbourne and other capitals.
What are APRAs New Guidelines?
The new measures introduced by APRA include restricting interest-only home loan applications to 30 percent of all new residential mortgages. This new regulation, introduced as some 160,000 newly built apartments are about to settle, may result in a price fall. In addition, the new legislation may cause funding issues for some investors, especially those with major lender finance.
Furthermore, this new legislation is expected to cool the market, especially in overheated Sydney and Melbourne. The biggest concern APRA is trying to overcome is growing household debt, stimulated by low interest rates. Plus, they are seeking to reduce strong competitive pressure in the mortgage market.
Also, the introduction of APRA’s new guidelines comes after banks announced home loan rate hikes. Moreover, the governing body state that their 10 percent speed limit on investment loans for banks would remain in place. Their reasoning being that investor lending was still at high rates.
According to the Australian Bureau of Statistics (ABS), investor lending has increased to 27.5 percent over the last 12-months. Over the month of January, this rate increased by 4.2 percent to $13.7 billion. Subsequently, over the same month, owner-occupier home loan values dropped by 0.2 percent to $20.13 billion.
At present, interest-only home loans makeup around 40 percent of residential home loan lending. This figure is considered as high when compared to international and historic standards.
Consequently, APRA have asked all banks to tighten their lending practices, especially in relation to interest-only and investment loans. Banks must place strict internal limits on interest-only loan volumes with loan-to-value ratios (LVR) above 80 percent. Those loans with an LVR over 90 percent must have strong justification for approval.
While APRA has not imposed an internal limit on interest-only loans, they have suggested restricting lenders exceeding the 30 percent cap. APRA have also indicated they would like all borrowers to have a financial buffer in place. Hence, this buffer will protect them from any unexpected events, especially if the borrower has a high level of debt.
Moves made by APRA come after banks made independent rate hikes. Along with suggestions that the May budget will seek to boost housing affordability with a likely cut in capital gains tax. Consequently, introducing these factors when home prices are high, will see the overinflated Sydney and Melbourne market’s fall. Economists suggest expected property price falls will be between 5 to 10 percent of current values. These drops will make the market more competitive.
Many economists state APRAs new restrictions are timely as household debt continues rising to record levels in relation to incomes. Plus, the Reserve Bank of Australia is concerned the volatile housing market may endanger the economy if not managed correctly.
According to Reserve Bank data, the average debt held by households is now 89 percent greater than incomes. Four years ago, this rate was 67 percent.
Accordingly, economists suggest that the high rate of household debt may become a target for monetary policy in the future. Therefore, it will join the Reserve’s ranks along with inflation and employment.
Banks are also keeping a watchful eye on household debt levels. Westpac economists looked at the ratio of household debt as a key indicator for the economic outlook and financial stability. Like so, low household income growth could have implications for consumption growth and household debt levels.