Buffers to stay tight
APRA announced today that for the time being the 3 percentage points lending assessment buffers will remain in place for mortgage borrowers:
Here is what the APRA Chair had to say:
Source: APRA
Quickly to step through those points...
Firstly, inflation has continued to moderate, and the risk of higher interest rates has receded.
No arguments there. Although it's become fairly fashionable to talk about the risks of steepling inflation, a more sober view suggests that there may soon be bigger fish to fry given how inflation has continued to moderate since the December 2022 peak.
Source: ABS
Markets are generally expecting interest rates to be lower over the years ahead, rather than higher, which doesn't necessarily appear to align with the 3 percentage points assessment buffer.
Source: ASX
Secondly, the regulator is mindful of shocks to households given the slowing labour market and geopolitical uncertainty.
"Geopolitical uncertainty" is always and everywhere an issue - like, literally always - so to be honest I'm not really sure what that point means.
Employment has grown by around +400,000 over the past year to a record high of above 14½ million, and the unemployment rate is 4.1 per cent. There isn't much evidence of how the lending assessment buffer factors into those figures either.
Thirdly, credit is available to good quality borrowers, and house piece growth has eased.
This is basically the crux of the matter currently - you can borrow to buy a property if you have an income of $250,000, and perhaps if you have wealthy parents to act as guarantors - but otherwise for first homebuyers and lower income-earners you're being stress-tested for a 9½ per cent mortgage rate that you'll never pay, and you're effectively locked out of the market.
And fourthly, house prices are higher than in 2020, and household debt levels are relatively high compared to long-term trends.
This is also true, although it's not clear that targeting housing prices or certain debt levels are the specific aims of the macroprudential policy toolkit:
"...[the] macroprudential policy toolkit is aimed at promoting stability at a systemic level to ensure financial institutions can continue to supply the credit and payment services required for the economy to grow at a sustainable rate".
The ratio of household debt to disposable income is currently around 1.85x - although if you net off mortgage prepayments buffers and offset account balances debt levels have remained manageable - and actually hasn't changed much for the past decade-and-a-half (a point regularly highlighted by the Reserve Bank of Australia economists, by the way, not by me).
The wrap
Overall, the ongoing constrained credit environment appears to be a co-ordinated attempt to conclusively break the back of inflation, and lending assessment buffers thus seem unlikely to change until interest rates are clearly on the way down.
This is working to slow inflation, but also has helped curtail building approvals to decade lows, and dwelling construction is consistently failing to keep pace with high levels of demand from rapid population growth.
From a financial stability perspective, in the short term restricting access to mortgage credit for lower income earners undoubtedly minimises any risks of arrears.
For the medium term, however, shortages of urban housing in magnet cities may be associated with volatility and risks later in the cycle, as previously evidenced in the US and Europe.
This was discussed in detail in
this book, for example.
---
P.S. Whenever you’re ready…here are 5 ways I can help you manage your own money and go next level wealth:
- Boom or Bust – 20 minute online workshop for investors
Register for my next free online training - Boom or Bust? How to change your investment plan - book in here
You also download a free copy of my e-book The Only 6 Ways to Become Wealthy here.
2. Download our property buying guide
Download our free property buying guide here.
You can also check out a few of our recent property investment purchases here.
Get in contact with us today if strategic property investment is your thing.
3. Subscribe to our Top 10 Podcasts for Investors
Listen in to our podcasts
The Australian Property Podcast is rapidly becoming one of Australia's biggest business podcasts, now with well over 50,000 audio downloads per month, and growing fast.
And our popular Low Rates High Returns Show also remains available on Spotify.
4. Subscribe for my free daily blog
Subscribe for my free daily blog with some 3.7 million hits here.
You can also catch up with me daily on Twitter here, where I'm active daily and have over 14,700 followers.
By the way, I'm an 8-times published author on finance and investing, so you can check out some of my books here.
My new book, co-authored with Cate Bakos is available to buy here or on Amazon here - follow our book release on Facebook here and at our Buy Right podcast series here.
5. Work with me privately
For a limited time you can book in a free diagnosis call with me here, so book in a call today.
