What has Coronavirus affected our finance markets?
Prior to the onset of COVID-19, housing finance conditions were becoming more accommodative for potential buyers.
This was enabled through:
- The repeal of temporary macro-prudential measures;
- The halving of the cash rate between June and October 2019; and,
- Declines in the typical mortgage serviceability assessment rate from 7.3% in March 2019, to 6.3% at December 2019.
Cash rate declines are also reflected in the indicator lending rates to March.
However, monetary policy and financial regulation has sharply shifted in response to COVID-19.
Policies now focus around deferring the implementation of a more conservative lending environment, ensuring high levels of liquidity among lenders, and ensuring low-cost debt to encourage spending.
Lending indicator rates as of March 2020
|
Buyer type |
Loan purpose |
Outstanding loans |
QOQ Change |
New loans |
QOQ Change |
| % per annum | % per annum | ||||
|
Owner-Occupier |
Principal-and- interest | 3.30 | ↓ | 2.92 | ↓ |
| Interest-only | 4.01 | ↓ | 3.48 | ↓ | |
|
Investor |
Principal-and- interest | 3.62 | ↓ | 3.22 | ↓ |
| Interest-only | 4.02 | ↓ | 3.49 | ↓ |
The target cash rate is at the effective lower bound of 0.25%, and will likely stay there for years
The RBA have adopted a record-low cash rate of 0.25%, which has previously been referenced at the ‘effective lower bound’₅.
This means that further reductions in the rate would not see any added benefit to the economy.
Reductions in the cash rate typically have an inflationary effect on house prices, with a 1% reduction in the cash rate increasing property prices by about 8% over two years₆.
However, due to extraordinarily low levels of consumer confidence, it is less likely that the record low cash rate would have as much upward demand pressure on housing.
Monthly change in national dwelling prices v RBA cash rate target
In an address given on the 21st of April, the RBA Governor also emphasised that the cash rate target would stay at a record low level until underlying inflation reached the 23% target band.
The RBA do not foresee that happening for at least two years.
Similarly, the cash rate target would not be increased until ‘full employment’ is reached (which has been defined as an unemployment rate of 4.5%). Governor Lowe indicated the unemployment rate could remain above 6% for the next couple of years.
Now that the cash rate is at the effective lower bound, the RBA has adopted ‘unconventional monetary policy’ to further encourage borrowing.This includes a 3-year government bond yield target of 0.25% through bond purchases in the secondary market.
This puts money back in the hands of investors, while also lowering the cost of debt for the government.
The RBA has also introduced a three-year funding facility for banks of up to $90 billion with a concessional interest rate of 0.25%.
Further funding will be extended specifically for lending to businesses.
For every $1 lent to large business, funding will be extended by $1. For every $1 lent to small-to-medium sized businesses, funding will be extended by $5.
It is noteworthy that there are no extensions of funding for home lending.
This echoes the structure of the broader stimulus package from the federal government, which skews support towards small to medium sized businesses.
APRA is adopting measures to compliment easier lending conditions amid COVID-19
According to the Australian Prudential Regulation Authority, banks were already in a strong capital position before the onset of COVID-19.
The indicator APRA uses to illustrate this is the CET1 ratio, which refers to the required portion of capital banks must hold against the risk component of assets.
The four major banks have a capital requirement of 10.5%, but in a recent statement, APRA highlights the capital held by the entire banking system equates to 11.3%₇.
In the same note, APRA acknowledged that in the current environment, it would be acceptable for these capital ratios to sink below the additional, high capital requirements set in 2017, provided banks can still meet minimum capital requirements.
This will give banks more room to lend in the coming months.
Other accommodations made by APRA include:
- new reporting methods for loans where repayment pauses have been offered for 6 months;
- postponed implementation of supervisory and policy initiatives to 2021;
- postponed implementation of Basel III reforms until 2023; and,
- suspended issuing of new banking licenses for 6months
Few signs of distress yet visible in the housing market
Each of these policies is highly important for allowing banks to offer reprieve to loan customers, including mortgage holders.
The current crisis could exacerbate one of the biggest downside risks to the Australian economy: high mortgage debt.
Housing debt was 142.1% of disposable household income at December 2019, which is a return to record highs after a small dip in the September quarter.
Ratio of housing debt to annualised household disposable income
If reductions in income mean this debt cannot be serviced, there may be increased incidences of distressed sales, which would bring broader housing market values down further.
It is worth noting that no such signs of distress are yet visible in the housing market.
This is supported by a very low level of for sale listings.
However, it is vital that if the COVID-19 lockdown extends beyond the allotted 6-months of mortgage reprieve, that banks may implement additional hardship measures aimed at reducing loan payments or extend deferrals on mortgage repayments further.
Otherwise, the period after 6-month loan deferrals will be a true test for the stability of the housing market.
Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on
If you're wondering what will happen to property in 2020–2021 you are not alone.
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