When thinking about a missive I often ask quiz myself about the topic.
‘Questions to myself’ so to speak.
I also think that Q+A webinars and presentations work much better than the typical ‘I deliver, you listen’ approach.
Anyhow, here are five questions and my answers to the current APRA move in an attempt to slow the housing market.
It seems like a very small move.
My gut call is no, it won’t.
Well not much.
Official interest rates have not increased.
Just the buffer.
It also assumes – which is a big assumption – that loan applications are honest when it comes to such things as income and liabilities.
APRA’s new rule is also not active until November this year – and pre-approved loans will not be reassessed at the higher buffer rate – so one can expect a rush in real estate activity and new home approvals this month.
This is already evident by the high auction clearance rates across the country last weekend.
APRA estimates that this new buffer would reduce the borrowing capacity of a typical applicant by 5%, dropping the average Australian household’s borrowing by $35,000.
Based on the big four banks, their variable mortgage rate currently averages 2.65%, so the minimum new ‘stress test’ rate would be 5.65% from November, up from the current 5.15%.
Yet Australian house prices, on average, have risen by $100,000 between December 2020 and June this year, and are set to potentially rise by more than double this amount between the 1st of July and the end of calendar 2021.
These rises are locked in.
Also, the new buffer rule also only applied to bank loans and not non-bank lenders.
Since the start of the pandemic, the share of home loans to non-bank lenders has risen from 6% to 11%.
The irony is that APRA’s current move has probably added more heat to the housing market rather than actually cooling it.
Q2: Surely most are honest these days when applying for a home loan?
We too have embellished our earnings and lowballed our expenses in our early years, and I am sure that many others do too.
According to recent research by UBS, some 41% of new home loan applications during fiscal 2021 were ‘not completely factually correct’.
This is up from 3% last year and has risen from 27% in 2015.
In terms of the areas where people are misrepresenting their financial situation, the largest portion comes from under-estimating their living costs followed by under-representing their financial commitments (i.e., not declaring other debts and borrowings).
Perhaps the most shocking thing in the UBS survey is that an astounding 69% of people with ‘liar loans’ in the broker channel claimed that it was the broker that suggested that they over/underrepresent to be able to get approved.
This is up by over 20% when compared to 2020.
More worrying, if you ask me, is that 22% of people with liar loans said it was their banker that suggested that they should be less than fully truthful on their application.
Q3: Is this ‘loan lying’ a capital city thing or more widespread?
If you look at where the properties that are purchased with a liar loan are located, there has been a steep increase in regional and rural properties – some 57% during financial 2021 versus 41% in 2020 - which I guess can be explained by the number of people moving away from the capital cities because of the pandemic.
The UBS work also shows the propensity to be less than fully truthful on a loan application if you own one or more investment properties, indicating that most of those lies are connected to income and expenses connected to investment properties.
In conclusion, it seems like the recent strong house price growth is forcing people to be less truthful on their mortgage applications.
Q4: Do you think the housing market needs to slow down?
An effective housing policy does not exist in Australia.
If we had one, then the answer would be no as the market would rise and slow accordingly.
But what we have is politics instead of policy.
The list of political (vote-getting) interferences with the housing is a mile long.
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These are well known and have been written about endlessly in inquiries/reports and include:
- First-home buyer schemes since the mid-1960s
- Capital gains tax discount and negative gearing
- Punitive taxes on developers and builders
- Zoning restrictions
- Under-funding of transport infrastructure
- Higher immigration after 2005
- And, above all, the recent cut in the RBA cash rate to 0.1 per cent.
And we have now more emotion in the mix than usual.
This has been caused by the pandemic.
To most Aussies our homes are everything.
We now work there, as well as sleep, eat and watch TV there.
Many of us can’t (or won’t) travel or go out much – we’re stuck at home, at least for a while longer.
It’s no wonder the market has got emotional.
I wrote as part of a Covid caveat in my consultancy work in the early days of the pandemic….
…. residential property is unlikely to be affected anywhere near as much as other property classes.
People will always need somewhere to live, and homes are the true “safe haven” in the current environment.
This sentiment may also loiter after this emergency passes. It may even strengthen the longer the virus remains unrestrained.
But seriously folks the current housing boom is mostly due to the lowest interest rates in history, which of course is also due to the pandemic.
Despite the rise in house prices and household debt, overall repayments have fallen.
But I digress, back to the question.
Strong price growth and over-the-top price expectations can lead to over-exuberance in housing markets.
In practice, however, it is difficult to determine if housing prices are over-valued in real-time.
On one hand, owner resident models - which compare the relative costs of owning versus renting a property, and so consider a range of factors including the decline in interest rates - suggest housing prices remain broadly in line with fundamentals.
But on the other hand, investment metrics of over-valuation such as price-to-rent and price-to-income ratios have increased markedly, suggesting that in most Australian cities housing values are currently overpriced.
See chart 1:
But history suggests, unless we get a black swan event, then housing values are likely to plateau after this current surge.
Note that I didn’t say ‘another’ black swan event, as I believe that Covid-19 was a grey rhino not a black swan as many suggest.
Q5: So, what’s next?
More APRA stuff or interest rate rises.
I think the solution – if we really do want to slow the housing market rather than give it just lip service – is to increase home loan rates.
This may happen to some extent without a move from the RBA as banks may need to lift them as a large part of their monies comes from overseas these days, but to really have some bite, and wide-scale impact, the official cash rate needs to rise.
I think one of the more foolish things I have heard of late - well apart from “Queensland hospitals are for Queenslanders” - is the RBA ‘promising’ that “interest rates won’t change until 2024”.
I think they will rise, and the first increase will be in 2022, post a federal election.
It won’t take much to slow the housing market if actual home loan rates increase (rather than an increase in a loan buffer) as there is little wage growth and when you investigate our household savings rate – see chart 2 – we really don’t have much saved for a rainy day.
Any end comments?
The new 3% APRA buffer is useful in that it informs us - well me anyhow - where interest rates are likely to end in the next couple of years.
At present, the cheapest home loan you can get now is about 2%, which will be 5% in the next three to five years.
The best buffer is likely to be an honest one.