Here’s how APRA caps could impact how much you could borrow

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The Council of Financial Regulators today announced APRA will consider possible macroprudential policy responses to address the medium-term risk created as a result of surging loan sizes. Recession Australia Note Money Economy Squeeze Tighten Save Saving Budget Cut 300x200

Ultra-low interest rates, strong demand for housing and soaring prices are stretching more borrowers into higher debt-to-income brackets.

While the regulator’s focus is on lending standards, changes under consideration are likely to help cool property prices.

Any new policy response must also ensure first home buyers are not unfairly impacted.

The discussion comes on the back of figures out this month showing 21.9 per cent of all new loans funded in the June quarter had a debt-to-income the ratio of six or more, which is considered risky by APRA.

This is up from 16 per cent of all new loans funded in the June 2020 quarter.

 

New loans with a debt-to-income ratio of 6 or more

June quarter 2020 June quarter 2021
16.0% of all new loans 21.9% of all new loans

Source: APRA quarterly authorised deposit-taking institution statistics, all ADI’s, released Sept 2021.House price to disposable income

What APRA lending caps could potentially include:

Potential changes Details Pros Cons
Debt-to-income ratio caps Limit the number of new loans with a debt-to-income ratio of 6 or more. Help prevent people from taking on risky levels of debt.

Could curtail investors buying multiple properties.

Could create a barrier for first home buyers unless exemptions are made.
Tightening of serviceability requirements Mandate serviceability floor rates or increase buffers. Currently, banks stress test loans at rates 2.5% higher or their floor, whichever is higher. Big 4 bank average floor is 5.09%. Will help protect people from mortgage stress when rates rise. Could unfairly impact first home buyers.
Investor lending caps Limit lenders to a set proportion of new loans to investors. From Dec 2014 – April 2018 APRA limited banks to 10% growth in investor loan books. Reduces the number of investors competing with first home buyers and other owner-occupiers. Investor loans are still proportionally at acceptable levels. The previous cap had limited success cooling property prices.
Low loan-to-value ratios caps Limit the number of new loans with small deposits. Caps could vary according to borrower type (investors are likely to be required to have larger deposits). Reduces risk in lending portfolios, particularly in the case of falling property prices. Could unfairly target first home buyers unless exemptions are made. The proportion of low deposit loans fell in the most recent APRA data.
Interest-only caps Cap the number of new loans that are interest-only. Between March 2017 and December 2018 banks were required to limit interest-only loans to 30% of new lending. Encourages borrowers to pay down their debt, protecting them when rates do rise. Could deter investors. Interest-only lending is currently well below the previous cap and therefore not required.
Combination of the above APRA could implement a cap that looks at a combination of levers to reduce risk without penalising first home buyers.

RateCity.com.au research director, Sally Tindall, said intervention from APRA would be welcomed, however, any new macroprudential policy measures must be carefully considered.

“Record low rates mean people can borrow more without blowing the budget, but what is blowing out are loan sizes,” she said.

“Measures designed to curb people’s borrowing power will help prevent some from taking on risky levels of debt, however, first home buyers must be supported in the process.

“Any regulation changes must make provisions for younger Australians to still be able to enter the housing market,” she said.

Now I disagree!

I remembered how macroprudential controls had undesired and unexpected consequences when they were introduced in 2015 – so I’d be very wary of any changes introduced again.

Dr. Andrew Wilson and I discussed this in our recent Property Insiders video and Dr. Wilson explains there is simply no case for interference in our housing market in this insightful article.

The last time lending restrictions were implemented in 2017, the focus was on dampening investor lending and the high percentage of interest-only mortgages.

However, this time around the main concern seems to be an increasing share of loans on a high debt-to-income ratio.

The problem is the potential restrictions are likely to hit first home buyers rather than Australia’s wealthy households.

Targeting debt-to-income ratios will have a limited impact on higher-wealth households, who often have multiple streams of income.

However, it will affect lower-income households and those purchasing property for the first time.

There are several reasons the debt to income ratio has risen over the past year.

  1. Firstly, the current low-interest rates allow borrowers to service more debt as the cost of money has fallen.
  2. The share of lending to first-home buyers has increased significantly on the back of HomeBuilder, the federal government’s First Home Loan Deposit Scheme, and individual state government incentives. Obviously, first-home buyers tend to be more indebted as they stretch to get into the market.
  3. Another reason that the debt to income ratio is have increased is that many established homeowners have upgraded their homes over the last year or two, partly because of the low-cost borrowing, partly because the value of the home has increased considerably given them equity to upgrade and also because of the increased requirements for more space such as a zoom room, etc.

What a cap on debt-to-income would look like

A ban or cap on new lending with a debt-to-income ratio of 6 or more would limit the amount many families could borrow to purchase a property.

 Family buying a house: maximum borrowing capacity of the average family if limited to a debt-to-income ratio of under 6

Note: Bank survivability tests would also apply and could potentially further limit people’s buying capacity.

Annual family income

(1.5 full-time wages)

Borrowing capacity with debt-to-income ratio under 6 Median house price Borrowing capacity required (20% deposit) Borrowing capacity required (10% deposit)
Sydney $137,615 $824,316 $1,293,450 $1,034,760 $1,164,105
Melbourne $136,555 $817,962 $954,496 $763,597 $859,046
Brisbane $128,443 $769,371 $691,214 $552,971 $622,093
Adelaide $122,452 $733,489 $568,110 $454,488 $511,299
Perth $146,617 $878,233 $556,509 $445,207 $500,858
Hobart $118,615 $710,501 $684,737 $547,790 $616,263
Darwin $132,226 $792,031 $572,102 $457,682 $514,892
Canberra $148,871 $891,736 $933,960 $747,168 $840,564

Notes: Family income is estimated at 1.5 times the average ordinary time earnings per state in original terms (ABS). Median house prices are from Core Logic August 2021 except Perth which is July 2021.

A debt-to-income ratio of 5.99 is assumed. LMI costs are not included.

Singles buying a unit: maximum borrowing capacity of an average worker if limited to a debt-to-income ratio of under 6

Note: Bank survivability tests would also apply and could potentially further limit buying capacity.

  Annual wage Borrowing capacity with debt-to-income ratio under 6 Median unit price Borrowing capacity required (20% deposit) Borrowing capacity required (10% deposit)
Sydney $91,744 $549,544 $825,514 $660,411 $742,963
Melbourne $91,036 $545,308 $615,909 $492,727 $554,318
Brisbane $85,628 $512,914 $425,777 $340,622 $383,199
Adelaide $81,635 $488,992 $364,575 $291,660 $328,118
Perth $97,744 $585,489 $404,257 $323,406 $363,831
Hobart $79,076 $473,668 $523,856 $419,085 $471,470
Darwin $88,150 $528,021 $349,698 $279,758 $314,728
Canberra $99,247 $594,491 $525,971 $420,777 $473,374

Notes: Average wage is from the ABS Average Weekly Earnings, ordinary time earnings per state in original terms. Median unit prices are from Core Logic August 2021 except Perth which is July 2021. A debt-to-income ratio of 5.99 is assumed. LMI costs are not included.

NOW READ: What’s the difference between borrowing capacity and affordability?

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au


'Here’s how APRA caps could impact how much you could borrow' have 6 comments

    Avatar for Michael Yardney

    October 3, 2021 Mark Nicholl

    Once international borders open, there will be a massive rental property shortage in this country. By limiting investors ability to borrow and the return of international students, will have the combined affects like nothing like we have seen before

    Reply

      October 3, 2021 Michael Yardney

      Mark – I agree with you – the regulators haven’t learned from previous mistake – the unintended long-term consequences usually overshadow the short-term result

      Reply

    Avatar for Michael Yardney

    September 30, 2021 John

    Thanks Michael, yes it confirms everything I was saying. They’ve made it so hard for investors in the past few years that people haven’t got the cashflow if they have multiple properties anymore and can’t progress without more lending options. I think people are put off by all the additional costs and restrictions. By the way Pam’s doing a great job with your hair…ha ha.

    Reply

    Avatar for Michael Yardney

    September 30, 2021 John

    Hello Michael,
    Hope you, Pam and families are all well.
    Whilst all the talk of APRA caps, affordability and rising prices are interesting and thought provoking I would like to ask you for some comments on rental demand and future rental stock.
    With tight rental vacancies in most states and apart from inner rings of Melbourne & Sydney, also existing investors selling up there seems to be growing pressure on our ability to house renters in the very near and mid term future. From what I have read there is already an undersupply of building in this area.
    Additional controls on borrowing for investment will only add to this dilemma for the Government. If as expected Australia’s immigration picks up once again once Covid restrictions are eased this will put rental stock and the building industry under pressure as well.

    As you have mentioned previously there will ultimately be a higher percentage of renters after this boom but where will they live. Unlikely that Governments will suddenly return to their role of providing public housing in a big way and by creating big housing estates. Yes much higher rents will be on the agenda but affordability in this area will also be stretched. Does the govt step in with more rent relief?
    Have you or Dr Wilson got a view on this part of the equation?
    I believe that this will only lead later to a more relaxed era for investors with incentives to get them buying and building again which means a continuation in the existing boom or a new boom in the coming years till some new balance is reached. I don’t see the Government having any other choice in the matter.
    Based upon this theory surely it would be better to let the market run it’s course naturally rather than interfere and cause another crisis in a part of the community which is already struggling and represents a growing part of the society.

    Look forward to your thoughts Michael.

    Reply


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