Welcome to Finance and Fury
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.
- 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%
- 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
- 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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