Australian property prices rose 1.5% in the month of September despite the fact that many of us were still living in a Covid Cocoon.
Housing values surged 20.3% higher in the past year, and even rose a massive 46 per cent in certain coveted school zones, pumped up by the Reserve Bank’s reassurances that its cash rate will stay at the current record low level until at least 2024.
This has many people asking: “How long can this go on?” What’s going to end this property cycle?”
Well, the market is already slowing down.
It has become increasingly clear our housing market has moved past its peak rate of growth which occurred in March when national dwelling values increased by 2.8% and now the monthly rate of growth has eased back to 1.5%.
The slowing growth conditions are the result of affordability issues as property values have grown significantly at a time when wages growth has languished along with fewer government incentives to enter the market.
Having said that it looks like October could be a stronger month as confidence is increasing as the end of lockdowns are in sight.
In other words, we’re still getting annualised double-digit growth, and this has added $1 trillion to Aussie household wealth in the first half of the year.
So how long will this go on?
If you would have asked me this question a couple of weeks ago I would have suggested that our property market would continue growing at the rate of 6 to 7% per annum throughout 2022 until eventually, affordability slowed the market down.
Remember the current upturn phase of the property cycle only commenced a year ago, in October 2020.
Normally the upturn stage of the property cycle lasts a number of years and is followed by a shorter boom phase which is eventually cut short by the RBA raising interest rates or by APRA introducing macroprudential controls to dampen the exuberance of property investors and home buyers.
However, this time around we have experienced an unprecedented rate of growth seeing our property markets perform even more strongly than anyone ever expected, with the rates of house price growth at levels not seen for a number of decades.
While a lot has been said about the 20% increase in property values many locations have enjoyed so far this year, it must be remembered that the last peak for our property markets was in 2017, and in many locations housing prices remain stagnant over a subsequent couple of years and it was really only earlier this year that new highs were reached.
This means that average price growth was unexceptional over the long term, averaging out at around 4 percent per annum over the last 5 years.
But over the last couple of weeks, there seems to have been a sudden change of sentiment about our housing markets from our financial regulators, the banks, and even our treasurer.
Recently the Council of Financial Regulators, the club of four main financial watchdogs, showed concern about the increased level of home lending in the first half of the year.
In particular, they signaled their concern about the number of mortgages taken out at more than six times the borrower’s income.
The council has asked APRA to put together a list of potential measures, but this is going to be a challenge and their response will need to be measured so as not to create unintended consequences such as a severe property downturn.
Just look back to 2014 when APRA checked house price growth by targeting investors and restricting the size of what they could borrow relative to the value of their housing collateral.
Then came the surprise!
Within a couple of days APRA responded and instructed banks and other authorised lenders that from November borrowers will need to be able to meet repayments at least 3 per cent higher than the loan product rate to receive a loan.
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If, for example, you apply for a mortgage with an interest rate of 2.5 per cent, the bank must now assess that you will still be able to make repayments if the rate rises to 5.5 per cent – rather than the previous serviceability assumption of 5 per cent.
These changes mean the maximum borrowing capacity for the average borrower will reduce by around 5 per cent.
Interestingly the new 3 per cent buffer rate does not apply to non-bank lenders. However, APRA is considering including them later this year.
While tougher lending standards will certainly take some heat out of Australia’s property markets by restricting the number of people that can get home loans, or lessen the amount they can borrow, it seems like the regulators are aiming to gently apply the brakes to the housing market, rather than slam them on.
There could be more macroprudential controls to come.
This increase in the serviceability buffer comes ahead of a broader information paper, due in the next couple of months, that will outline APRA’s approach to macroprudential policy in more detail.
Further measures, specifically debt to income limits are a possibility with APRA signalling this by requesting lenders “review their risk appetites for lending at high debt-to-income ratios ” and that further macroprudential measures would be considered if concentrations of high debt-to-income loans continue to rise (currently around 22% of new loans have a debt-to-income ratio greater than 6x).
So, back to the question of when will this property cycle end.
There is little doubt that these macro prudential controls will have a negative impact on our property markets and slow the rate of growth of housing values.
After all that’s what they’re intended to do.
Whether the markets will just experience slower growth or stop dead in their tracks will depend on what other measures are introduced.
The recently introduced measures are just going to slow market down from six gear into third or fourth gear – our property markets are not going into reverse.
It is likely that targeting debt to income ratios will have 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.
If you think about it, first homebuyers don’t have a “trade in” of a previous home and therefore need to borrow higher loan to value ratios.
On the one hand, the government says it wants to encourage first homebuyers, and on the other hand it is encouraging the regulators to sideline them.
So in the meantime it’s just wait and see what our regulators choose to do.
I hope they have learned from the results of previous interventions, otherwise if history repeats itself, there will be some unintended consequences.
Watch this space.