Lending Rates to Tighten Again

Once again, the Reserve Bank of Australia (RBA) has decided to maintain the official cash rate at the record low rate of 0.1%.  This is the 10th straight month the cash rate has stayed so low.

According to the Chief economist at CreditWatch, Harley Dale, “the RBA has established a clear intention to retain strong support for households and business. There is no place to increase the rate until 2024, and policies are being maintained to assist in keeping downward pressure on borrowing costs”.

He believes this environment “will be very beneficial for businesses and households, and the highly stimulatory money policy climate will also be crucial in moving through the uncertainty of a post-lockdown economy.  This is something the RBA will be keeping a close eye on.”

Despite the cash rate maintaining its position, lending is set to tighten once again with the Treasurer revealing recently that he had met with regulators to discuss “the balance between credit and income growth” and consider whether “carefully targeted and timely adjustments” to lending are required.

The approaching reintroduction of lending restrictions for residential property, which the RBA plays an integral role in, makes this a key area to watch in approaching months.

The Australian Prudential Regulation Authority (APRA) recently announced to lenders that it would expect authorised deposit-taking institutions to assess a new borrower’s ability to meet their loan repayment at an interest rate that is at least 3% above the loan product rate.  This could mean at rate as high at 5.09%.

Prior to the APRA announcement, there had been speculation that lending restrictions would become tighter in response to continually rising property prices and the increasing disconnect with affordability, prompting many to question whether lending should be limited to six times a borrower’s income.  Since APRA’s decision, many groups have weighed in on the decision and how the increased buffer could impact potential property purchasers.

CoreLogic’s head of research Eliza Owen suggested investors could bear the biggest burden based on APRA’s move. This is because many owner occupier mortgage rates are lower than investor rates.  Ms Owen states that “while the announcement may seem like a subtle change to housing lending conditions, there may be more tightening to come as the Council of Financial Regulators monitor trends in house credit and household debt”.

However, according to the Housing Industry Association (HIA), it will be first home buyers who bear the brunt of the changed borrowing conditions.  HIA chief economist Tim Reardon states “Over 90% of renters aspire to own their own home, but less than half of them expect that they will ever achieve this goal. First home buyers are the group who are typically constrained by serviceability thresholds. It is this group that will be hit hardest by these changes.”

Mr Reardon said that financial regulation that have been put in place since 2010 have made it “progressively more difficult for first home buyers to enter the market and pointed out Australia’s unquestionably strong financial section and low levels of mortgage delinquency as reasons APRA should not have increased the serviceability buffer”.

Compound growth rate by suburb (according to realestate.com.au)

4.5% for houses and 2.1% for units – Alexandra Hills

505% for houses and 1.7% for units – Birkdale

3.2% for houses and 3.6% for units – Capalaba

4.6% for houses and 2.7% for units – Cleveland

No figures currently available for Mount Cotton

6.3% for houses and 2.9% for units – Ormiston

4.0% for houses and 4.2% for units – Redland Bay

No figures currently available for Thornlands

6.5% for houses and 2.5% for units – Thorneside

3.4% for houses and 4.1% for units – Victoria Point

4.9% for houses and 1.0% for units – Wellington Point

Remember, if you need any help or advice, we are just a phone call away.

All the best, Simon.

Sources: Real Estate Business, Smart Property Investment, realestate.com.au

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