August, 2022

The pressure is on for small business

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Just as soaring prices bite at household budgets, businesses are dealing with their own financial pains. The costs of debt and doing business are rising, and there’s no more pandemic-related government support to provide some buffer.

According to an Australian Bureau of Statistics survey, 46% of businesses saw an increase in operating costs in June, more than double the share of companies the previous year. An equally high proportion (44%) were expecting operating expenses to climb in July.

But a bigger headache for businesses, especially small ones, is poor cash flow.

Recent research from accounting software firm Xero found that 92% of small businesses had negative cash flow at least once in 2021. This experience lasted more than six months for one in five companies. On average, Australian small businesses went through 4.2 months of negative cash flow.

Figure 1: Months of negative cash flow among small Australian businesses, 2021

Source: Xero’s Crunch: Cash flow challenges facing small businesses

“The fact that cash flow improved during the pandemic, despite spikes in cash flow crunches at the start of 2020, shouldn’t be a cause for celebration,” says Joseph Lyons, Xero Managing Director for Australia and Asia.

He points out that while government support schemes such as JobKeeper and JobSaver helped buoy cash flow back to pre-pandemic levels, improvements stemmed from businesses slashing expenses – often because they were forced to reduce trading hours.

“Cash flow doesn’t give a full picture of small business health, but it does offer a strong indicator of how much pressure small businesses are facing. And we’ve seen little to no lasting improvement for Australian small businesses even post-pandemic,” says Lyons.

Months of negative cash flow can create serious challenges for small businesses, especially those with limited access to credit, adds Xero Chief Customer Officer Rachael Powell.

“It can lead to mounting expenses, unpaid wages, lost jobs and owners dipping into personal savings and equity to keep their company afloat. If cash flow crunches become a chronic and repeated occurrence, the business will ultimately fail.”

Turning cautious

Small businesses are already trading cautiously. Their average payment defaults were up 18% annually in June, according to credit reporting agency CreditorWatch. Its data shows that average default rates are rising among small businesses.

“We continue to see a disturbing rise in trade payment defaults, our leading indicator for future business insolvencies,” says CreditorWatch CEO Patrick Coghlan. “Court actions are also back to pre-COVID levels.”

CreditorWatch Chief Economist Anneke Thompson believes companies will be increasingly wary of credit customers and their ability to pay going forward.

“Businesses in the growth phase, [which] require equity or debt for growth, may now see these lines of funding get increasingly more difficult to source,” she says.

Conditions still robust but confidence falls

Still, NAB’s recent survey shows that business conditions in general remain strong despite a fall in confidence.

“Conditions strengthened in Q2 [2022] as the disruptions related to the virus receded,” says NAB Group Chief Economist Alan Oster. “Trading, profitability and employment were all higher with conditions approaching the high levels seen in early 2021.”

Forward-looking indicators also look good. “Businesses have high expectations for employment over the coming year, indicating that labour demand remains very strong, and capex expectations also remain elevated.”

Getting help

For small businesses, cash flow doesn’t have to be a persistent problem. By working with a trusted lender, they can better manage their finances and access funding to help them beat cash flow crunches.

July, 2022

Refinancing is booming, but who is winning?

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Borrowers are rushing to refinance their home loans as the reality of rising interest rates kicks in. With major banks passing on the Reserve Bank’s recent rate rises in full, smaller providers are becoming customers’ lenders of choice.

According to a recent Finder survey, 18% of participating mortgage holders refinanced their home loans in the past six months. Another 18% are planning to do the same in the next six months.

“Households are in a very precarious position right now, struggling with the worst cost-of-living crisis in decades,” says Sarah Megginson, Head of Editorial at Finder. “For some, it’s a case of refinance or default on their debt.”

Total refinanced loans already hit a record high of $19 billion in May, when the Reserve Bank lifted the cash rate for the first time in almost 12 years. According to Finder’s analysis, this represented an increase of 20% over the year.

Figure 1: Volume of refinances across Australia via PEXA’s platform

Source: PEXA Refinance Index, July 2022

Recent data from online property exchange PEXA confirms that refinancing is booming. In early July, the number of refinancing deals lodged through its platform rose by 16% over the year – and by nearly 29% over the quarter.

Queensland had the highest increase out of all the states, with a year-on-year increase of 34% and a quarterly growth of 26%.

Banks lose out to smaller lenders

As borrowers hunt for lower rates, they are increasingly turning away from the major banks and towards smaller lenders, according to PEXA Head of Research Michael Gill. This is especially noticeable in the major markets of New South Wales and Victoria.

“If you look back to the start of the pandemic, the major banks were quite successful in winning more refinancing,” says Gill. “Obviously, those fixed rates motivated many borrowers to move across.”

Data from comparison site Mozo shows that the big four banks’ one-year fixed rate now averages 4.80% per annum, higher than the 4.71% among all the lenders tracked by Mozo. For a five-year term, the big four’s average is 6.34% per annum compared to Mozo’s 6.09% average for all lenders.

For comparison, the one-year fixed rate of lenders in Mozo’s database averaged 2.60% in March 2022, and their rate for a five-year term averaged 3.83%.

“Fixed rates are basically out of the market now,” says Mozo banking expert Peter Marshall. “The big banks are certainly not trying to attract customers with their fixed rates, so they’re looking at what they can do to get people in the door and give them their loans.”

Mozo consumer advocate Tom Godfrey believes mortgage holders can save tens of thousands by shopping around and switching to lenders with better deals.

“Given the savings on offer, it’s hardly surprising we’re seeing a shift to challenger lenders [and] away from the big four banks.”

An opportunity for brokers

Mortgage brokers have an important role to play in this fast-changing market. With their knowledge of mortgage products, they can help clients make the right decision when switching to another lender or home loan.

“Some people may be unaware that they are on a standard variable rate, which will fluctuate more if not properly looked at or managed,” says Joseph Daoud, Co-founder of broker Simple Finance. “They should look at their statements and see how much their rate has increased and look to refinance from this position.

“It’s best to get in touch with expert brokers to help them evaluate their best choices.”

June, 2022

Time to Worry About Rising Interest Rates and High Household Debt?

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Is trouble brewing for heavily indebted households as interest rates rise?

The Reserve Bank of Australia has lifted the cash rate twice in the past two months, rapidly taking it to 0.85% from a low of 0.10%. This has ended the era of super cheap home loans as banks pass on the RBA’s interest rate rises to borrowers in full.

And with the central bank likely to raise the cash rate again to curb inflation, mortgage holders are in for more interest rate pain.

Figure 1: Australian household debt as a percentage of GDP

Source: Bank of International Settlements

The debt connection

Australia has one of the highest levels of overall household debt in the world, with recent data from the Bank of International Settlements showing it is equivalent to 119% of GDP.

AMP Chief Economist Shane Oliver explains what this means in absolute terms. “In 1990, there was on average $69 of household debt for every $100 of average household income after tax. Today, it’s $187 of debt for every $100 of after-tax income.”

With most of that debt linked to mortgages, households are sensitive to increases in home loan interest rates.

According to comparison site Finder, June’s 0.5 percentage point hike alone would add $159 to monthly repayments on a $600,000 mortgage with a 3% home loan rate. That’s nearly $2,000 a year.

“We have a big potential problem courtesy of the way we have run our housing system for not just the last decade but for the last at least three decades,” says Chris Martin, a Senior Research Fellow at the University of New South Wales’ City Futures Research Centre, referring to policies that have encouraged Australians to get into debt.

In what he calls a “double whammy for indebted households”, Tim Lawless at CoreLogic notes how the added cost of loans comes as prices of non-discretionary goods rise more than twice those of discretionary items.

“Higher costs for food, fuel and finance are likely to see household savings continue to taper as families funnel more of their income towards servicing their mortgage and funding essential costs of living,” says Lawless.

Not a major problem

Oliver acknowledges that the combination of rising rates and high household debt is an issue. But he believes it’s not as bad as it looks.

“First, the rise in debt partly reflected a rational adjustment to lower rates and greater credit availability since the 1980s,” he says. “Second, household debt has been trending up since credit was invented.”

In other words, it was natural for household debt to have soared to where it is now.

Australians have also created more wealth than they have accumulated debt, thanks to a surge in home values and financial holdings, particularly post-pandemic. This gives them a buffer against the rising interest rates.

“So while average household debt for each Australian has risen from $11,779 in 1990 to $107,318 now, average wealth per person has surged from $87,489 to $655,894.”

Oliver adds that most Australians are still servicing their loans diligently, as banks’ low levels of non-performing loans suggest. It’s also higher-income households that hold more debt, which means that they have better capacity to pay back their loans.

“Finally, lending standards did not deteriorate to the same degree in Australia as they did in the US prior to the global financial crisis,” says Oliver.

“The key is that the RBA only needs to raise interest rates far enough to cool demand to take pressure off inflation and keep inflation expectations down.”

May, 2022

What Now for the Housing Market?

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The housing market has lost steam after two years of breakneck growth. Dwelling values in select suburbs had already dropped by as much as $200,000 in the three months to April, as interest rates begin to rise along with the cost of living.

For small business owners looking to borrow using their home equity, this might be a good time to work with a mortgage broker to get a better interest rate.

The PropTrack Home Price Index shows national housing prices grew 0.13% in April. This was the slowest monthly increase since May 2020, with Sydney and Hobart recording their first monthly declines since the start of the pandemic housing boom.

The housing market grew 16% in the year to April, about the same rate as a year ago.

Figure 1: Australian housing market annual growth, April 2022

Source: PropTrack Home Price Index, April 2022

Figure 2: Price growth of houses and units

Source: PropTrack Home Price Index, April 2022

The slowdown is not surprising, according to PropTrack Economist Angus Moore, adding that housing market growth has lost its momentum.

“Prices were up 35% since the pandemic began, and we were never going to maintain that growth.”

Pricey suburbs lead price falls

Another report reveals that expensive inner-city suburbs are leading the broader decline in prices. Housing values in Sydney’s Beaconsfield fell 8.5% or $168,000 in the three months to April. In Darlinghurst, they dropped more than $206,000 or 8.3%.

Declines are more modest in Melbourne suburbs. In Park Orchards, prices fell 7.1% and in Balaclava 5.1%.

“Higher income households tend to hold more housing debt to income, so do property investors,” says CoreLogic Head of Research Eliza Owen.

“That’s why the high end of the market can often be more sensitive to changes in interest rates or credit conditions, but this can also affect some other popular investment markets like inner-city areas.”

Further declines likely

The April slowdown came just before the Reserve Bank of Australia lifted the official interest rate for the first time in more than 10 years.

This suggests that further price falls are likely as expected rate hikes make it difficult for some borrowers to meet mortgage repayments.

Based on its May 2022 survey of property analysts, Reuters expects Australian housing market growth to slow to just 1% this year. This is down sharply on the 6.7% it forecast after its February 2022 poll.

However, it predicts prices to drop 8% next year, more than the 5% forecast after its February survey.

“A steep increase in mortgage rates over the coming year will weigh heavily on house prices,” says ANZ Senior Economist Adelaide Timbrell, one of Reuters’ respondents.

Westpac also expects dwelling values to drop 8% in 2023, but it expects them to fall at a higher rate of 2% this year. The bank based its forecasts on an expectation that the official interest rate would rise to a peak of 2.25% by May 2023, up from 0.35% now.

Market conditions have already turned, according to Westpac Senior Economist Matthew Hassan.

“Sales are down sharply from last year’s extreme highs, buyer sentiment is plumbing new cycle lows and house price expectations are being pared back quickly,” says Hassan.

But Housing Industry Association Chief Economist Tim Reardon doesn’t expect price falls to be as substantial as some observers predict.

“As interest rates increase, the high growth cycle will stall and we’ll enter a different cycle where prices will decline,” he says. “But it’s difficult to see house prices falling significantly while we still have a shortage of supply.”

March, 2022

Housing Investors Are Back in the Driver’s Seat

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After a few years of being largely on the sidelines, housing investors are very much back. They’re borrowing more money than ever, driving a rise in lending even as mortgage rates are poised to rise.

According to latest data from the Australian Bureau of Statistics (ABS), new investor loan commitments for housing rose 6.1% in January 2022 compared to the previous month – and a staggering 67.8% year on year. In contrast, lending to owner-occupiers climbed 1% in January compared to the previous month.

“The value of new loan commitments for investor housing has grown for 15 consecutive months, consistent with the strong housing market and growth in house prices,” says ABS Head of Finance and Wealth Katherine Keenan.

Borrowers in the Australian Capital Territory (up 22.8% over the previous month), Victoria (up 11.1%) and New South Wales (up 9.8%) drove the rise in investor loans.

Figure 1: New housing loan commitments as of January 2022

Source: Australian Bureau of Statistics, Lending indicators, January 2022

Owner-occupier lending still larger

Revival in investor lending comes after a period of subdued activity caused by a regulatory crackdown on high-risk lending.

In 2017, the Australian Prudential Regulation Authority introduced a 30% cap on lenders’ share of new interest-only home loans to try to cool down the overheating property market. It eventually scrapped this limit, following its move to drop an earlier restriction capping lenders’ investor loan growth at 10%.

But even with the rising investor loan commitments, new lending to this cohort represented only a third – or $11 billion – of the total in January 2022. New housing loans for owner-occupiers accounted for $22.7 billion.

Figure 2: New housing loan commitments by purpose

Source: Australian Bureau of Statistics, Lending indicators, January 2022

“This reflects the rapid growth of owner-occupier commitments over the past 18 months,” says Keenan.

However, data suggests that this trend might be starting to slow.

The number of new loan commitments to owner-occupier first home buyers dropped 6.9% in January 2022 compared to the previous month. It fell across all markets except the Australian Capital Territory, where the figure rose more than 25% during the month.

Brokers settling more loans

The comeback in investor activity promises another area of opportunity for mortgage brokers after a period of robust growth for the channel.

According to the Mortgage & Finance Association of Australia (MFAA), brokers settled $95.7 billion worth of home loans in the December 2021 quarter – the highest quarterly figure ever reported.

This represents a nearly 50% jump from a year ago, when mortgage brokers settled a record $64.1 billion in home financing.

Writing two of every three home loans, mortgage brokers facilitated 66.5% of all new housing credit during the quarter. This was the highest ever recorded for a December quarter and was up 7.1 percentage points compared to a year ago.

A vote of trust

For MFAA Chief Executive Officer Mike Felton, the results reflect a continued vote of consumer confidence in the service mortgage brokers provide – and the choice they bring to the home loan market.

“To have our industry grow almost 50% year on year in terms of the volume of loans settled is a phenomenal result, and sends a powerful message as to the state of our industry following the significant changes made,” says Felton.

“The combination of reforms implemented – alongside brokers’ dedication to their customers – continues to produce strong consumer outcomes, driving trust and confidence and reinforcing that mortgage broking is a force for good that supports competition and choice that is critical to the Australian economy.”

February, 2022

Have Housing Prices Peaked?

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Australia’s property market ended 2021 by smashing records, with median house values across all capital cities surpassing $1 million for the first time. But has the market peaked?

New data from Domain shows that median house prices rose 6.5% to $1.07 million and unit values grew 1.9% to $621,880 in the last quarter of 2021, continuing a trend that’s driven up homeowner equity and lifted many business owners’ borrowing capacity.

Figure 1. Quarterly change in Australia’s median house and unit prices

Source: Domain’s December 2021 House Price Report
Figure 2. Stratified median house prices

Source: Domain’s December 2021 House Price Report
Figure 3. Stratified median unit prices

Source: Domain’s December 2021 House Price Report

According to Domain’s Chief of Research and Economics, Dr Nicola Powell, demand continues to eclipse supply in most of Australia’s capital cities.

“House and unit prices continue to beat records nationally due to lockdown activity rebounds in Sydney, Melbourne and Canberra, high household savings and the ongoing demand from Australians to buy a property,” says Powell.

“Since the pandemic began, house prices have risen 52%, the highest rate of growth recorded across the capital cities.”

Record growth in capital cities

House prices in Sydney had particularly spectacular growth. They rose by roughly $1,100 a day over 2021, or 33.1% annually, to reach $1.6 million in median value – the city’s steepest annual growth rate on record.

Sydney’s unit prices also hit a new record high of $802,255 in 2021, growing 8.3% annually.

In Melbourne, median house values reached $1.1 million and unit prices $593,387, growing by 5.8% and 3.9% respectively over the last quarter of 2021, as buyer and seller activity rebounded after months of lockdowns.

As house prices hit a new high of $1.2 million, Canberra has become Australia’s second most expensive city for buying a house. Growth in unit prices fell 1.6% to $555,644 over the quarter, though.

Losing momentum

While it’s hard to know for sure if the housing market has reached its peak, the combined house and unit price growth in the December 2021 quarter lost momentum compared to earlier in the year, according to Domain. This suggests that the peak rate of growth has passed. And this year, the breakneck increase in prices, and housing affordability problems, are likely to weigh on demand.

“The rapid escalation in house prices will be a financial barrier for entry buyers and upgraders against a backdrop of low wages growth,” says Powell.

“The disparity between property performance and associated affordability constraints is expected to drive demand to units. While it is still a competitive market for home hunters, rising supply and easing demand trends should support more realistic seller prices and greater buyer choice.”

Impact on demand

Westpac Senior Economist Matthew Hassan agrees.

“Key factors at play here are around the challenges of affordability – which will weigh on housing demand over the year ahead – and the shifting situation in policy settings, particularly from the Reserve Bank of Australia,” he says in a report.

Hassan points out that the growing expectation is that increases in the official cash rate will be brought forward this year. Ultra-low interest rates have been one of the major drivers of the rising property prices in recent years. Now, with the cash rate possibly going up earlier than 2023 as previously expected, this casts a pall over demand for housing.

“The Westpac economics team now expect[s] one rate hike of 15 basis points in August this year, followed by a further hike of 25 basis points in October, and further increases carrying through most of 2023 and 2024,” says Hassan.

“And our most recent Westpac–Melbourne Institute consumer sentiment survey showed 55% of consumers, too, think rates will rise this year. This is the highest proportion expecting interest rate rises since February 2018.”

Taking all this into account, Hassan expects “a very different period ahead for the housing market”.

“The days of half a trillion a quarter value gains in the dwelling stock look to be behind us now,” he says.

December, 2021

The 2021 Lending Market for SMEs: An Overview

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2021 brought a unique set of circumstances to the lending market for small and medium sized enterprises (SMEs). Despite changing regulations, the ongoing impact of COVID-19 and changes in the property market, SMEs continued to borrow to manage and grow their businesses.

COVID-19 affects lending

Early in the year, SMEs faced challenges accessing funding as COVID-19 exacerbated lending disparities between small and large businesses. While SMEs have reported difficulty accessing funding for years, 2021 was especially difficult as the economy recovered and small business owners sought external funding in an attempt to expand their operations. According to research conducted at the beginning of the year, nine out of 10 SME owners reported feeling frustrated about the difficulty in securing funds for their business. Loan conditions, the need to provide property as security and a lack of flexibility were some of the major sources of annoyance.

However, the volume of lending to SMEs started to grow again towards the middle of the year. While this took a hit after further lockdowns were enforced, entrepreneurs gained confidence in seeking funding to grow their business, with 81% of respondents in a survey conducted by business lender Banjo reporting feeling confident about their long-term prospects.

Property boom

The surge in home prices presented opportunities for SME growth. Low interest rates and a seemingly exponential rise in home values allowed many business owners to use the equity in their properties to fund and grow their businesses.

With the value of the Australian housing market surpassing $9 trillion in value, the Australian Prudential Regulation Authority (APRA) did introduce some curbs to slow lending to ensure that the financial system remained safe and that borrowers are able to afford the level of debt they are taking on.

Observers also believe this isn’t the end of regulatory efforts to slow down the property market, and that changing regulations will continue to complicate the housing loan application process. This is likely to affect small business owners looking to leverage their home equity to fund their business.

Faced with the ups and downs in the market this year, mortgage brokers have been enlisted in record numbers (16,968 this year) to help customers navigate these challenges. Finance brokers who understand the diverse market of fintech and non-bank lenders – and who have the ability to comprehend business accounting practices – are in the enviable position of being equipped to help businesses take full advantage of the strength of the market.

To read any of our 2021 articles, go to primecapital.com/insights

November, 2021

Where’s the Housing Market Headed?

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After last year’s off-the-mark forecasts, it’s tough to predict with certainty where the housing market is going next, especially as factors such as  interest rates and new policy measures come into play. But what’s clear is that prices aren’t likely to fall sharply in the coming months. They still have room to grow before they start to level out.

In this month’s Finder RBA Cash Rate Survey, 38 economists and other experts predict Sydney’s house prices will rise 8%, or more than $102,000 on average, by the end of 2022. Their forecast for Melbourne was higher at 9%, taking the average house price there to $954,800.

Nationally, Westpac expects dwelling values to grow 8% in 2022, up from its previous forecast of 5%.

But the housing market is slowly losing momentum since reaching a monthly peak of 2.8% growth last March, according to CoreLogic Research Director Tim Lawless. Prices eased to 1.49% in October from 1.51% the previous month, which Lawless attributes to a lack of affordability, rising supply and waning government stimulus.

Figure 1: Change in Australian housing values, October 2021
Source: CoreLogic, Hedonic Home Value Index, October 2021
Figure 2: Monthly growth rate in Australian housing values

Source: CoreLogic, Where have monthly value changes fallen the most?

“Housing prices continue to outpace wages by a ratio of about 12:1,” he says. “This is one of the reasons why first homebuyers are becoming a progressively smaller component of housing demand. New listings have surged by 47% since the recent low in September, and housing-focused stimuluses such as HomeBuilder and stamp duty concessions have now expired.

“Combining these factors with the subtle tightening of credit assessments set for November 1, and it’s highly likely the housing market will continue to gradually lose momentum.”

Starting this month, banks must assess new borrowers’ ability to pay back loans at an interest rate that’s at least 3 percentage points higher than a loan’s rate. Observers largely see this as the beginning of a new credit tightening cycle as the Australian Prudential Regulation Authority (APRA) fears the growing housing debt might pose risks to the broader economy.

“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” said APRA Chair Wayne Byres in announcing the new rules.

Rising risks

Looking ahead, Lawless sees growing downside risks for the housing market. These include a further tightening in credit policy and the possibility of an early hike in the cash rate, on top of worsening affordability and increasing housing supply.

The Reserve Bank kept the official cash rate at 0.1% this month but is now predicted to raise it earlier than 2024, as previously expected. Economists such as those from Commonwealth Bank and AMP Capital have forecast that the cash rate will rise as early as November 2022.

“Once interest rates start to lift, there is a strong chance that housing prices will head in the opposite direction soon after,” says Lawless in a separate report.

Banks have in fact already started raising their mortgage rates, a move that could temper demand for housing. Data from RateCity shows that in October alone, 26 lenders raised at least one fixed rate.

“The fixed rate hikes are now coming thick and fast and they’re getting bigger as we go,” says RateCity Research Director Sally Tindall.

“The mortgage market is undergoing a transformation and it’s happening faster than expected. The speed at which global economies are improving has seen the cost of buying funds spike, putting pressure on banks to lift fixed rates.”

Working with a partner

As banks tighten their credit assessment, it’s even more important to work with a partner who understands the mortgage market well. A mortgage broker can help borrowers, including small business owners, to navigate changing lending requirements to ensure they get the solution that best meets their needs.

October, 2021

What Can You Expect from APRA’s New Lending Curbs?

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The Australian Prudential Regulation Authority (APRA) has stepped in to tighten bank lending standards just as the housing market surpassed a staggering $9 trillion in value. As the share of heavily indebted borrowers in banks’ loan books rises, APRA fears growing risks to financial stability.

“More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income, and at an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead,” said APRA Chair Wayne Byres.

Under the new rules, authorised deposit-taking institutions will have to assess new borrowers’ ability to pay back loans at an interest rate that’s at least 3 percentage points higher than a loan’s rate. This is 0.5 percentage points higher than today’s common housing loan serviceability buffer.

“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” Byres added.

Figure 1: Australian housing credit growth
Source: Reserve Bank of Australia Chart Pack, October 2021

Impacts of the new rule

APRA estimates the higher buffer will reduce maximum borrowing capacity by around 5% and says it expects the change to have a limited effect on housing credit growth.

“Given some borrowers are already constrained by the floor rates that lenders use, and that many borrowers don’t borrow at their maximum capacity, the overall impact on aggregate housing credit growth flowing from this is expected to be fairly modest,” said APRA.

By borrower type, the regulator expects investors to feel greater impact than owner-occupiers because they typically borrow at higher levels of leverage. “On the other hand, first homebuyers tend to be under-represented as a share of borrowers borrowing a high multiple of their income as they tend to be more constrained by the size of their deposit.”

Figure 2: Housing loan commitments

Source: Reserve Bank of Australia Chart Pack, October 2021

But first homebuyers will bear the brunt of a higher serviceability buffer, according to Housing Industry Association Chief Economist Tim Reardon.

“First homebuyers are the group who are typically constrained by serviceability thresholds. It is this group that will be hit the hardest by these changes,” he said in a report.

“Restricting access to credit for new households seeking to enter the housing market will put further downward pressure on the rate of home ownership in Australia.”

More policy changes likely

While the new curb is expected to slow the housing market, APRA said it’s not aiming to temper dwelling prices, which are rising at their fastest annual growth rate in more than 30 years.

“Rather, APRA’s objective is to ensure that mortgage lending is conducted on a prudent basis, and that borrowers are well equipped to service their debts under a range of scenarios,” said the regulator.

But many housing market observers believe this is not the end of regulatory efforts to take the heat out of the property market.

“In the context of the current strength of the housing market, this is a modest change,” said David Plank, ANZ Bank’s Head of Australian Economics. “As such, further macroprudential tightening seems more likely than not.”

Brokers can help

Changing regulations tend to make applying for a housing loan complicated, including for small business owners who are looking to use their home equity to fund their businesses. To navigate these challenges, many individuals are turning to expert mortgage brokers.

The number of borrowers using brokers has also risen during the COVID-19 pandemic as some lenders have tightened their home loan policies. Data from the Mortgage and Finance Association of Australia (MFAA) shows that housing loans settled by brokers between October 2020 and March 2021 rose more than 24% year on year to reach a record of $122.8 billion.

The number of mortgage brokers also increased to 16,968 during the period, up by more than 470.

“Mortgage brokers were able to assist a record number of customers in taking advantage of the historically low interest rates and strength in the market, and in doing so achieved some of their most positive results to date,” said MFAA CEO Mike Felton.