Home Loan Crackdown Likely to Trigger Slower House Price Growth, Not Price Drops Yet
House prices are not likely to drop in the following year even if it ends up being more challenging to get a large home loan, Economists warn that house values are instead set to continue rising at a modest pace.
After Treasurer Josh Frydenberg backed limitations on homebuyers tackling more than six times their income in debt, it is likely that a clampdown on home lending in the coming months.
When this happens lenders will be focusing on reducing the number of borrowers who have only a small deposit and checking that borrowers can repay home loans if interest rates climb higher.
The Reserve Bank warns that due to the rapid growth in credit that it is vital that lending standards are maintained and that loan serviceability buffers are suitable.
After skyrocketing growth in property values over the previous year, which CoreLogic data shows resulted in greater than 20 per cent increase nationally, economists are anticipating smaller price rises for the upcoming year as a result to affordability constraints as well as tighter lending.
However there is little suggestion house prices will drop yet, even though the last time lending standards were tightened up in 2017 it was accompanied by a double-digit percentage decline in prices.
After a five-year property boom, the Australian Prudential Regulation Authority constricted the share of new home loans that can be composed as interest-only from early 2017.
Economists claim the drop in property prices that accompanied was additionally influenced by the Financial Services Royal Commission the following year and its focus on responsible lending.
Anxious lenders began declining home loans to those who spent excessively on Uber Eats. While during the lead-up to the 2019 federal election, the Labor Party disclosed plans to limit negative gearing tax concessions to newly constructed properties.
This time around, the move should be against the backdrop of a recouping economy and any adjustments are expected to be small at first. A lot depends on the degree to which they tighten these measures as well as just how many will be used at the same time.
The expected first move will be lenders limiting the share of new loans to those with debt levels more than six times their annual income. For instance, that could be a minority decrease of new loans from the current 22 per cent to 15 per cent of new loans.
This would have a fairly microscopic effect on property prices than a hostile ban on loans of more than six times the borrowers incomes combined with more rigorous serviceability buffers.
AMP Capital Chief Economist Shane Oliver noted that previous lending clampdowns have had mild effects. He said, “from late 2014, financial institutions could only offer 10 per cent of their new credit to investors, but property values continued to rise for a period, then fell modestly before accelerating again.”
After the 2017 modifications to interest-only loans, the property market kept rising slightly until springtime, when it began to drop, as well as the declines intensified the following year during the Royal Commission and the litigation over responsible lending.
Commonwealth Bank head of Australian economics Gareth Aird stated, “for property prices to fall, the likely trigger would be higher interest rates, which the Reserve Bank in its central scenario does not expect until 2024.”
A prospective borrower under a lending clampdown would certainly be offered less money than they’re presently being provided. That, by itself, does not indicate the property market is going to fall.
Borrowers will certainly be provided a little less and that will probably take a little bit of heat out of the property market.
Mr Aird stated, “The moves should come amid a recovering economy, as consumer confidence held up, many stood-down workers expected to return to their old jobs as the vaccine rollout allows workplaces to reopen, and the housing market continued to record high clearance rates through lockdown.”
Regulators are not targeting house prices, only working to provide financial stability.
Without doubt, there are some truly essential and challenging issues that need to be addressed. For example, we’re seeing an extraordinary rise in property prices compared to incomes. Which most definitely means that young people are most disadvantaged because of this.
In fact, ANZ senior economist Felicity Emmett has cautioned that moving too far and pushing house prices down might affect the broader economy. The absolute last thing the Reserve Bank would want is for these curbs on credit growth to be enough to really drop house prices and for that to flow through into broader economy.
The primary concern is if there were another economic shock or interest rates rose. Those heavily indebted consumers would certainty cut they’re spending, specifically when income growth is weak.
If changes to lending happen at the same time with another economic shock, prices could fall, however this is quite improbable.
Westpac senior economist Matthew Hassan has said, “The economy looks well-positioned for a vaccine-led reopening of some sort [and] the labour market looks likely to be tight rather than slack next year.”
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