“Tighter Lending Conditions” many would-be buyers are hearing as their banks decline their loan application. But where do they go next if they have to settle on that property?
The latest numbers are in – the housing market downturn across Australia are well underway.
Sydney saw a steep drop over the quarter, with the median house price down 3.1 per cent ($36,000), the latest Domain House Price Report shows.
Melbourne’s median house price saw an even steeper decline of 3.9 per cent or a $35,000 reduction over the quarter. In both cities, units are now outperforming houses.
Nationally, house price falls were more subdued, down 2.6 per cent over the September quarter to $781,787.
But where did the downturn come from? One minute Sydney and Melbourne seemed bound for perpetual house price inflation, and next the (more colourful) headlines are reading “bricks and slaughter”.
‘Tighter lending conditions’: What does it mean?
“Tighter lending conditions” basically means mortgages are becoming harder to get.
Certain mortgage products are becoming more expensive, maximum borrowing amounts are declining and more people are being refused loans. But, what the man or woman in the street might not understand is that not all lenders have such tight lending conditions.
This slows growth in the amount of credit available for housing, in turn lowering prices.
The above chart shows the interaction of the RBA cash rate, median metropolitan dwelling prices and institutional interventions. Cash rate cuts implemented in response to the global financial crisis serves to increase house prices. In 2014, APRA advised a 10 per cent growth limit on investment lending. As this virtually coincided with more cash rate cuts, prices continued to rise. However, after the enforcement of a 30 per cent limit on the portion of interest only loans, prices quickly responded.
How did we get here?
In December 2014, concerned about risky lending, the Australian Prudential Regulation Authority (APRA) stepped in.
Chairman Wayne Byres wrote to major banks, advising that mortgage lending to investors should not grow above 10 per cent a year. But, remember that not all lenders are governed by APRA.
The letter implied a major rap over the knuckles if mortgage lending to investors exceeded a growth rate of 10 per cent.
Banks complied with the recommendation by the September 2015 quarter. Even though this benchmark has since been removed, growth in investor lending has stayed low.
APRA also foreshadowed increases to bank capital reserves. Changes to borrower assessments were also made, to ensure borrowers could properly afford repayments.
Investor lending then slowed between 2015 and 2016, even sinking back below the value of loans to owner-occupiers in Victoria.
However, house prices continued to grow.
This is because, around the same time APRA set the growth limit, the RBA undertook four cash rate cuts. As money became cheaper, borrowing rose in the owner-occupier space.
Between the February 2015 rate cut, and the latest release of housing finance data, the annual value of new owner-occupier lending has risen 40 per cent in NSW, and 47 per cent in Victoria.
Stamp duty concessions for first home buyer owner-occupiers – introduced in 2017 – also encouraged an increase in lending.
The 30 per cent limit on interest-only lending
In March 2017, APRA announced another credit tightening measure – again to the lenders for which it has responsibility.
This time, interest-only loans would be limited to just 30 per cent of new mortgages generated.
Interest-only loan terms mean the first few years of a mortgage only require interest repayments, rather than also paying down the principal.
Interest-only loans are popular with investors. APRA cites tax incentives as a motivating factor behind this. Negative gearing, for example, is more effective with an interest-only loan, because only the interest part of a mortgage is deducted from taxable income.
As a result, a cap on interest-only lending proved highly effective in targeting the investor sector of the market.
Banks had six months to meet this new requirement, and they responded quickly. The portion of new investors with interest-only loans funded fell from 67 per cent to below 40 per cent.
In the year leading to the 30 per cent cap announcement, investors comprised 56 per cent of the value of money being lent for mortgages in NSW (excluding refinancing). In Victoria, they comprised 46 per cent.
The relationship between changes in investor lending and dwelling price growth is particularly strong in NSW. Hence it is likely that “tighter lending conditions” became a significant driver of dwelling declines.
Now mortgage rates are rising
The RBA cash rate is not the sole determinant of mortgage rates.
A current pressure on banking costs is the ‘credit-deposit gap’: where banks face higher costs for credit while receiving low-interest repayments on outstanding loans.
This means that banks may need to pass on higher costs to existing or new mortgage holders. In other words, mortgage rates will rise.
While most banks have increased interest rates for mortgage products, not all mortgage products and customers are seeing the same increases.
Investors absorbed the largest interest rate increases. Interest-only loan rates for investors rose an estimated 100 basis points between 2015 and 2018. Principal and interest loans for investors rose 50 basis points.
Interest-only mortgage rates have also gone up for owner-occupiers by about 50 basis points.
More recently, banks raised rates for existing customers, while offering discounts for new customers in an attempt to increase market share.
Cheaper investor and interest-only loans could still be sourced from lenders that are not regulated by APRA.
While lenders unregulated by APRA only comprise a small part of the market — less than 5 per cent of outstanding housing credit, C&N Finance is increasingly financing its clients through these lenders who will still lend in ways the banks cannot.
A managed market downturn
Normally housing downturns are created by one of two things:
- Rising interest rates
- Rising unemployment
Today, Australia suffers from neither which implies that the current downturn will be unlike its predecessors.
Chances are it will be less free-fall than before. And, because there is still some lending going on, a floor will be created under property values.
If you want to understand who is still lending on property, please contact Chan & Naylor Finance here.
Aside from home loan assistance, have a look at our accounting and advisory services that we do to help you achieve greater success.
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Chan & Naylor Group has nationwide offices in North Sydney, South West Sydney, Sydney, Pymble and Parramatta in New South Wales, Melbourne, Moonee Ponds and Hawthorn in Victoria, Brisbane and Capalaba in Queensland, and East Perth in Western Australia that can assist you with your home loan application no matter what the lending conditions are, as well as any property tax or business tax enquiry that you may have. Contact us today.