The property market stripped bare

There are many explanations for the current housing market boom, such as lower interest rates, relaxed borrowing rules, buyer grants, building incentives, stamp duty waivers and tax cuts.

But while these have all contributed in some way to the rise in buyer demand, they don’t explain the dramatic increase in the number of potential buyers, or the huge rise in their buying power.

When we strip the market down to the basics, we are left with just two facts that explain why housing prices are booming and tell us what’s around the corner.

That’s because property purchases consist of two amounts – your deposit, and what the banks will lend you.

The banks require you to make a significant deposit on the purchase price of your property, because this protects them from risk if its value falls.

They also need to protect themselves from risk if interest rates rise, so they apply a floor rate which is two or three percent higher than the standard variable rate to your loan application.

This serviceability test shows whether you can keep up repayments if interest rates go up and it controls the amount of housing finance that they will lend you.

These solutions have always made it difficult for first home buyers to obtain housing loans, but now everything has changed, and it’s largely because of the pandemic.

There are more potential home buyers than ever before

The need to have a big deposit has always been the first big stumbling block for potential home buyers.

But last year, we had to endure lockdowns, social distancing, and border closures while many people working from home.

We stopped spending on travel, clothing, recreation, entertainment, and holidays and saved the money instead.

As a result, many aspiring home buyers have managed to save enough for a deposit and so the number of potential first home buyers has increased dramatically, with a fifty percent rise in first home buyers entering the market over the last year.

Banks are willing to lend more to each potential home buyer

But it’s not only the number of first home buyers that has increased – the amount that banks are willing to lend has also gone up.

This is because the banks have significantly lowered the floor rates against which they test home loan serviceability.

During the pandemic, lenders lifted their floor rates to seven percent and more, because they were worried that a severe economic recession was heading our way.

Now, however they have dramatically cut their floor rates because the economy is back in growth and the RBA has given an assurance that interest rates won’t rise for some years.

The result is that potential home buyers have received a massive uplift in their assessed loan serviceability and higher loan amounts are being approved.

For those who like stats, this table shows the greater home buying capacity that the lower floor assessment rates have given potential buyers, when this is based on their household income.

On average, the reduction has given home buyers the capacity to lift sale prices by up to twenty-five percent or more above pre-pandemic levels.

About John Lindeman John Lindeman has well over a decade of experience researching the nature and dynamics of various types of assets at major data analysts and is a leading property market researcher, author and commentator. For more information visit Lindeman Reports.