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A modest headwind for a hot housing market – for now

11:14am October 13 2021

Westpac senior economist Matthew Hassan discusses APRA’s new loan serviceability requirements. (Josh Wall) 

After months of ‘will they or won’t they’ chatter, the Australian Prudential Regulation Authority has stepped in to counter rising risks in the housing market. 

So, what does it mean for prices? 

Well, in short, not much – in the short-term at least.  

APRA’s move last week to increase the interest rate buffer banks use when assessing customers’ serviceability of loans from 250 basis points, or an additional 2.5 percentage points on top of the rate being offered, to 300 basis points is only expected to reduce the average borrower’s maximum borrowing capacity by around 5 per cent.

In addition, it will only impact the minority of people who borrow the absolutely maximum they can, with investors the cohort of buyers most impacted given they are most likely to have loans being assessed on the buffer rate and tend to carry more debt overall (serviceability tests are applied to total debt not just the loan being considered). 

So, while it’s definitely going to take some of the heat out of the market and confidence may wane a touch, it’s unlikely to result in a material slowdown given the strength at the moment. 

National price growth is running at close to 20 per cent per annum and the latest auction market results remain strong, despite a drop off in volumes, indicating further gains ahead. 

Indeed, with vaccine rollouts hitting key levels and a gradual easing in restrictions in coming months, Australia’s housing market looks set to sail through the delta lockdown shock largely unscathed.

That said, this is likely just the beginning of “macro prudential” intervention to cool the market with more measures likely early next year, perhaps in the form of limits on high debt to income and high loan to vaue lending. 

Add in stretched affordability and the prospect of actual interest rate increases in 2023, it’s looking like price gains will moderate back towards single digit price growth by the end of next year and perhaps even some modest price falls the year after. 

But for the time being, the hottest housing market in many years still has a bit further to run.

The information in this article is general information only, it does not constitute any recommendation or advice; it has been prepared without taking into account your personal objectives, financial situation or needs and you should consider its appropriateness with regard to these factors before acting on it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. You should also consider obtaining personalised advice from a professional financial adviser before making any financial decisions in relation to the matters discussed.

Matthew is a senior economist with Westpac. His specific areas of expertise are housing markets and the Australian consumer sector. Matthew’s research has been instrumental in shaping Westpac’s views on the Australian economy, including recent calls on official interest rates. His research has provided important insights into housing market developments and the behaviours of the Australian consumer. He is the author of Westpac’s monthly Red Book report, regards as essential reading on the consumer sector. Before joining the Westpac team in 2007, Matthew held senior positions with leading economic consultancies in Australia and New Zealand.

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