November, 2019

Bank Credit Remains Elusive

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Interest rates have hit historic lows and home prices are bouncing back. But housing credit remains beyond the reach of many Australians, creating opportunities for mortgage brokers to help would-be borrowers.

A recent survey by CoreLogic shows Australians are still finding it hard to get home loan approvals. About 45% of respondents identified the difficulty of getting credit as a barrier to buying a home, up from 39% in 2017. In fact, housing credit grew at an all-time annual low of 3% in October – down from 5% a year ago. Growth in investor housing credit has stalled, expanding at just 0.2% year on year.

“The severe tightening of credit availability following stronger prudential regulation and outcomes related to the banking Royal Commission is hurting Australians, who are struggling to get a loan,” said CoreLogic Research Director Tim Lawless. “Lenders also have a greater focus on evaluating and assessing individual borrower’s expenses.”

Figure 1: Credit growth by sector, by each year’s end

Source: Reserve Bank of Australia (RBA) with data from APRA

Figure 2: Housing credit growth as at end of August 2019

Source: RBA with data from APRA and the Australian Bureau of Statistics

Too Scared to Lend

Major banks continue to be very cautious about lending, even though it has been years since the introduction of tougher prudential rules.

In December 2014, the Australian Prudential Regulation Authority (APRA) set a 10% limit on banks’ investor lending growth and required them to assess applicants’ serviceability by using interest rates of 7% or more. It then introduced a 30% cap on the share of interest-only home loans as a percentage of banks’ new mortgages in March 2017.

APRA has since scrapped these rules. But it continues to require banks to more closely scrutinise loan applicants’ incomes and living expenses, which analysts believe is having more serious consequences for prospective borrowers. Banks must also follow the Australian Securities and Investments Commission’s responsible lending rules.

Tighter scrutiny of living expenses – from Uber rides and Netflix subscriptions to travel spending – puts applicants through rigorous and often drawn-out application processes. For some, this means failing to make the cut.

Policymakers have acknowledged that major banks have gone overboard in fulfilling their responsible lending obligations. Reserve Bank Governor Philip Lowe recently said that though banks’ lending standards have been strengthened, “in some areas the pendulum may have swung a bit too far”.

“Lenders should not be so scared of making a loan that goes bad that they don’t provide the credit that the economy needs,” said Lowe at the Reserve Bank Board dinner in October.

Credit Growth Expectations

How long might the credit squeeze go on? Westpac expects housing credit growth to increase to 3.5% by September 2020. Commonwealth Bank of Australia also has positive expectations of lending growth as the November 2019 data from its Household Spending Intentions series shows a sharp increase in home-buying intentions.

“The sharp upswing in home-buying intentions continues and intentions are now approaching the record highs seen in early 2017,” said Commonwealth Bank Chief Economist Michael Blythe.

But even with more people intending to buy property, and prices trending upwards in major markets such as Melbourne and Sydney, stringent requirements and processes for applying for housing loans remain. Banks are expected to continue scrutinising the financial circumstances and living expenses of would-be borrowers, as APRA requires.

“The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards,” said APRA Chair Wayne Byres in announcing the axing of the 7% interest rate rule in July.

As major banks make getting credit doubly difficult, more would-be borrowers are turning to smaller banks and other lenders. Analysis by Morgan Stanley shows that housing loans grew 16% for non-banks and 8% for smaller banks in the 12 months to April 2019. In contrast, major banks’ mortgages collectively expanded at 2.3% year on year.

“Major banks face a competitive disadvantage and are likely to see further market share losses in mortgages,” said Morgan Stanley.

November, 2019

What’s Behind The Rebound In Home Prices?

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Housing prices are rising again. In October, national home values rose 1.2%, the largest monthly increase in more than four years. Home values in Sydney and Melbourne had recovered 6% and 5.3% respectively since the housing market bottomed out in May 2019, according to CoreLogic.

This is good news for homeowners, investors and particularly for business owners who have taken out loans using equity in their homes. But what’s driving this pickup in prices? And is it sustainable?

Figure 1: Australian home values as at end of October 2019

Source: CoreLogic

The Election Factor

One theory is that the rise is partly thanks to the Coalition Government’s win in the May federal election, signalling continuity and less uncertainty in the property market.

“It’s likely that buyer demand and confidence is responding to the positive effect of a stable federal government, as well as lower interest rates, tax cuts and a subtle easing in credit policy,” said CoreLogic Research Director Tim Lawless.

Before the election, the Labor Party proposed halving the capital gains tax discount and limiting negative gearing to new homes to help improve housing affordability. According to some analysts, a Labor win would have adversely affected property markets and led to cooling prices. SQM Research, for example, estimated that such policies would have led to capital city home prices falling up to 12% by 2022.

While the election results might be a factor in the rise, it’s important to note that home prices did not go up immediately after the election. Data from the Grattan Institute shows that though they climbed 0.14% collectively in Australia’s five largest cities right after the election, they then remained stagnant for the next three months.

“If the election result had a big effect on prices, it certainly took its time to show up in the data,” the Institute’s Brendan Coates and Matt Cowgill wrote in a recent blog post.

Figure 2: House price movement in Australia’s five largest cities, 2019

Source: Grattan Institute using CoreLogic data

Price Increases After APRA Move

A likely bigger contributing factor to the recent price surge is that banks have started loosening their serviceability requirements following a rule change. The Australian Prudential Regulatory Authority (APRA) relaxed its guidance on banks’ serviceability assessment in July 2019. Previously, it had required banks to assess applicants’ ability to pay back home loans by using interest rates of 7% or more. From July, banks have been able to set their own minimum rate floor, with a buffer of at least 2.5% above the loan’s interest rate.

APRA introduced the serviceability guidance in late 2014 as a part of a package of rules to strengthen home lending standards. But as banks tightened their requirements, credit became increasingly out of reach for would-be borrowers, particularly in Sydney and Melbourne. Many property observers blamed this for the housing slump that started in late 2017.

The rule change has increased borrowing capacity by 10% to 15%, and since August, home prices have soared in Sydney and Melbourne, according to Coates and Cowgill.

“If sustained, the pace of current increases would see double-digit annual house price growth in Sydney and Melbourne over the next year,” they said in September.

Figure 3: House price movements in Sydney and Melbourne after a rule change

Source: Grattan Institute using CoreLogic data

Supply Also A Driver

Limited housing supply could be another driver of the recent rebound in prices. As Reserve Bank Governor Philip Lowe pointed out in a speech in March, the recent correction in prices had its origins in housing supply’s inability to meet demand as population growth surged. Australia’s population grew markedly in the mid-2000s, but it took nearly 10 years for the rate of home building to catch up with demand.

With housing construction now contracting, some economists believe limited supply is pushing prices up.

“The recent bounce back in house prices in Sydney and Melbourne looks like it’s a result of limited supply and a move by owner-occupiers to enter the market,” said Sarah Hunter of BIS Oxford Economics in a recent interview.

Data from the Australian Bureau of Statistics shows that the value of residential construction work done dropped 8.7% year on year in the June 2019 quarter, in seasonally adjusted terms. Westpac economists expect housing construction to contract by 11% in 2019 and a further 8% in 2020.

What’s Next?

As prices go up, economists have been quick to come forward with new projections on how much home values will rise and whether Sydney and Melbourne can sustain their pace of price growth.

Westpac expects prices in Sydney and Melbourne to increase by around 12% by the end of 2020 from their lows in May 2019. AMP says price recovery will likely be muted.

“Our assessment remains that after a further bounce, price gains will be constrained through next year due to still tighter lending standards, unit supply, slow growth and rising unemployment,” AMP Capital Chief Economist Shane Oliver said in a recent interview.

Low interest rates should help drive house prices up over the next few years. The Reserve Bank cut the cash rate by 0.25% in early October, bringing it to a record low of 0.75%.

“If the Reserve Bank cuts rates by a further 50 basis points in the coming months, as markets expect, prices could be 8% higher than otherwise,” said Coates and Cowgill shortly before the October rate cut.

October, 2019

Older Australians Face Debt And Distress

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More older Australians are carrying the heavy burden of mortgage debt into retirement, causing them psychological distress. This suggests a growing risk of failure to meet mortgage payments on time.
According to a new study, the average mortgage debt of Australians aged 55 and above soared 600% – from $27,000 in 1987 to nearly $186,000 in 2015. Among older homeowners, the proportion of those still paying off their mortgage doubled to 28% over this period, said researchers of the study for the Australian Housing and Urban Research Institute (AHURI).

Figure 1: Mortgage debt for Australians aged 55 and above

Source: AHURI, Mortgage stress and precarious home ownership: implications for older Australians

“We’re also seeing these older Australians’ mortgage debt burden increase from 13% of the value of the average home in the late 1980s to around 30% in the late 1990s when the property boom took off, and it has remained at that level ever since,” said Rachel Ong ViforJ of Curtin University, lead author of a report based on the study.

Income growth falls behind

Older mortgagors have found it increasingly hard to meet repayments as their average mortgage-debt-to-income ratio tripled from 71% to 211% between 1987 and 2015. The study estimates that on average, annual repayments rose from $5,000 to $17,000 over the period.

Older homeowners’ income growth has lagged behind their mortgage debt levels and only doubled between 1987 and 2015, according to the report. Data from the Australian Bureau of Statistics shows that of the nearly three in four indebted households in 2017–18, 28% were servicing a total debt that was three or more times their annual disposable income. Most of this debt related to property ownership.

The steep rise in the mortgage-debt-to-income ratio reflects a sharp increase in repayment risk among older mortgage holders, according to the report. And this raises the chances they will struggle to pay their mortgage on time.

Figure 2: Trends for mortgagors aged 55 and above

* Outright owners included in sample to calculate incidence of mortgage indebtedness. Source: AHURI, Mortgage stress and precarious home ownership: implications for older Australians

Mental health suffers

As older mortgage holders face payment difficulty, their stress levels increase and wellbeing declines. Their mental health and psychological distress scores are markedly lower than those of outright homeowners.

“These mental health effects are comparable to those resulting from long-term health conditions,” said ViforJ.

Notably, women suffer more than men. The study’s psychological surveys found that mortgage difficulties reduce mental health scores by around 2 points for older men and 3.7 points for older women.

“Older female mortgagors’ mental health is more sensitive to personal circumstances than older male mortgagors,” said the researchers. “Marital breakdown, ill health and poor labour market engagement all adversely affect older female mortgagors’ mental health scores more than men’s.”

Potential outcomes

Older Australians are likely to have longer working lives and use their superannuation savings to pay off mortgages as they deal with indebtedness, the report noted.

The researchers found that as older homeowners’ average super balances dropped from $471,000 in 2010 to $271,000 in 2014, their average equity stakes in property increased from $621,000 to $667,000. This suggests that older retired mortgagors are drawing down their super savings for use in property purchases.

While older Australians may be willing to work longer to pay off loans, shocks such as unemployment and ill health might keep them from working and earning later in life. Such setbacks can push those with overly optimistic expectations into serious mortgage stress, the report stated.

“It is therefore important for policy makers to consider measures to assist older mortgagors to hedge exposure to mortgage payment difficulties.”