Regulators should intervene sooner rather than later: Connective

On Wednesday (6 October), APRA raised the minimum interest rate buffer it expects the banks to use to assess serviceability of home loans.

Lenders will now be required to evaluate new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3 percentage points above the loan product rate (up from the current 2.5 percentage point level).

The step may be the first of multiple, as the regulator has not ruled out implementing other measures.

Connective executive director Mark Haron told Mortgage Business he hadn’t been surprised as there had been “noise in the media” around potential curbs for lending and surging house prices.

Mr Haron doesn’t expect many immediate impacts for mortgage broker processes, commenting the raised threshold will merely squeeze the amount that consumers can borrow.

But he noted there could be knock-on effects for both brokers and lenders if the regulators do not address the housing and mortgage markets tactfully.

“The key thing I want to see is that we have a sustainable housing market,” Mr Haron explained.

“So if regulators do have to step in to curb some overheating in some way, shape or form, I’d rather they do it sooner rather than [later] such that we don’t have knee jerk reactions which cause significant issues because sustainability is crucial to industry.”

APRA had introduced the new measure after a meeting with the Council of Financial Regulators last week, a group which also includes ASIC, Treasury, the Reserve Bank of Australia (RBA) and the ACCC.

Treasurer Josh Frydenberg had attended the meetings, to discuss steps to combat surging house prices and debt levels, after both the International Monetary Fund (IMF) and RBA had sounded warnings around negative consequences for Australia’s financial stability.

APRA had also expressed concerns around a rise in high debt-to-income (DTI) lending, after the proportion of borrowers securing loans worth more than six times their income from the banks rose to 21 per cent in the June quarter.

Both APRA and the Reserve Bank had already monitored the housing and mortgage markets for months, having discussed what tools they would use to intervene.

The prudential regulator is set to soon release information around how it will use its macroprudential tools.

FHBs: Serviceability versus house prices

Mr Haron noted the government and regulators have “competing agendas”, as schemes for first home buyers to enter to market have been pushed out.

As reported by the government on Wednesday (6 October), close to 53,000 people have now accessed its home-ownership schemes for first home buyers and single parents since the grants launched last year.

As APRA has fired its first warning shot, there have been concerns around how increasing the serviceability buffer could hurt first home buyers. Housing Industry Association (HIA) economist Tim Reardon has warned rookie buyers are typically already constrained by serviceability thresholds.

But Mr Haron believes the raised buffer won’t ultimately affect buyers as much as prices.

As reported by CoreLogic, the Australian housing market surpassed $9 trillion in value this week.

“There’s a bit of challenge. To me, increasing the serviceability buffer, I don’t think will have a dramatic effect on property price increases and in my mind, it doesn’t have a huge dramatic effect on first homebuyers as such because serviceability isn’t a first home buyer issue, it’s actually saving the deposit and it’s also stamp duty and those things,” Mr Haron said.

“Property prices and values are the biggest issue for first home buyers. As they hopefully flatten out and normalise, or don’t continue to rise as much, that will help first home buyers more than the serviceability issue.”

But more houses may come onto the market in the spring season and as NSW and Victoria exit their lockdowns – with Mr Haron saying an increased supply may result in a slight dissipation in the growth of house prices anyway.

Investors are expected however to feel effects from raised serviceability buffers, with their ability to refinance likely to be tapered.

“In a lot of cases, in any of those refinancing situations, or even a further purchase situation, assessment of the serviceability capacity flows across all of their debt, in some cases that could dampen the opportunities for some people who already have significant property portfolios and debt portfolios,” Mr Haron said.

Brokers could see opportunities

Mortgage brokers could be set to see a flurry of activity as a result of APRA’s action, Mr Haron reflected.

While some will need to revisit and reassess their pipeline of pre-approvals, and to work with some customers to reapply for smaller loans, others may be able to reap some opportunities, he said.

“What it will do, I believe, is actually spur more people to be a little bit more active and proactive in what they’re looking to do if they are looking to do anything. Might bring some of that forward,” he commented.

“If they have concerns that this is going to go further, they’ll be looking to try and get into a property or upgrade their property sooner rather than later. So it creates some further opportunities for brokers to make sure that they’re talking to the customers about it, educating the customer about it, and getting the customers to work with them to do something sooner rather than later.”

[Related: Concerns raised over impact of buffer change on FHBs]