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Looks like borrowing for property purchase is going to be easier. APRA is looking to make some changes to lending criteria enforced onto the banks.

Today:

  • Run through what these changes are
  • Why they are occurring
  • What the lending environment looks like over the next few years

What is happening with the RBA and borrowing restrictions from APRA?

  • Interest rates are strongly related to the interbank cash rate
  • Made it clear that they are cutting rates in 2 weeks’ time from 1.5% to 1.25%
  • Banks lend at a margin slightly above the cash rate that covers their expenses, makes a profit and pays the deposit levy
  • The cash rate of 1.5% and variable lending rates of around 3.75% leaves a 2.25% buffer
  • But banks assess your borrowing capacity at an interest rate of 7%
  • This is set by APRA, and they are going to remove the serviceability assessment at 7%

Government plans:

  • APRA has removed its quantitative guidance on the level of the serviceability floor rate at 7%
  • Authorised Deposit-taking Institutions or banks use to assess home loan applications
  • December 2014 is when the assessment of serviceability floor was imposed as 2% on top of variable loan product rate
  • At the time variable rates were around 5%
  • A single person on $80,000 would be able to borrow nearly $100,000 more under proposed changes
  • Lower cash rates = lower interest rates on loans
  • Lower hurdle rate of assessment in what you can afford = you can borrow and afford a larger loan

Why are these changes being proposed?

  • Property prices are outside of peoples’ borrowing capacity
  • Banks were forced to start looking at borrowers’ actual expense, forced by ASIC
  • Introduced changes to the national consumer credit protection Act RG 209
  • Responsible lending conduct was introduced and reasonable inquiries into all other expenses
  • The old approach was the HEM Benchmark which wasn’t very accurate
  • It looked at where you lived and some other statistics, form here it estimated your expenses
  • Since last year, household lending has decreased by 30% due to these new requirements
  • Because the banks are lending less, the regulatory body’s solution is lower the interest assessment criteria

What does this mean for you?

  • Access a larger loan
  • Access a cheaper loan
  • Help property prices, as people can get access to funds
  • These are good if you own property, are looking to refinance or are looking to buy
  • But what about the long term?

This isn’t the only side to lending

  • Credit regulations – assessment by banks onto customers
  • Requirements set by APRA and ASIC
  • Prudential regulations – assessment on the allocation of lending for risk control
  • Prudential regulation requires controlling the risk by lending to low risk, high collateral borrowers
  • The banks need to hold adequate capital as defined by capital requirements
  • This is why housing is so popular as it is safe and sound

One side of lending is easier, the other side of risk control is increasing

  • Business and self-employed lending – previous episode link
  • Household debt to GDP in Australia is at an all-time high, going into non-value adding activities
  • While it is easier for salaried individuals to get loans, it is harder for self-employed people

This policy will increase what is dragging our economy backward

  • Household disposable incomes have increased by about 2.5% p.a.
  • The previous decade was about 6% p.a.
  • The misallocation of spending is going towards a company but not adding new economic activity
  • People are not spending on services, goods, and other non-financial businesses
  • People are too busy paying down their massive loans
  • Business revenues then can decline, as nicer things in life get cut
  • Any company impacted by reduced revenue, it is harder for them to get funding
  • Those companies are forced to close and people lose jobs

The misallocation of lending

  • Increased residential cost = excessive lending to the residential housing sector
  • This is at the expense of businesses
  • Regulations and risk control incentivise lending to one borrower over another
  • Banking system to allocate lending away from the most productive areas of the economy
  • The logic of cutting rates it to make it easier for businesses to borrow and invest and households having a higher disposable income to increase consumption
  • This has not worked to date

Summary:

  • High household debt leaves the economy vulnerable to economic shocks
  • Australia has slowed down in economic growth and rates have only decreased since 2012
  • If you are looking to borrow to buy
    • Can you afford higher rates?
    • What are the cash flow requirements now and in the long term?
    • Don’t get in a position where you are forced to sell, have some buffer prepared
  • There are limitations to monetary policy from the RBA
  • The government can provide additional fiscal support
  • We will cover more monetary policy in Friday’s episode
  • How one person can send a market up or tank

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