Changing Lending Rules

From November, the Australian Prudential Regulation Authority (APRA), has made a simple, but significant change to the lending rules for banks. It is an effort to slow down the overheated property market. Good in theory, but again, will probably have unintended and negative consequences.

Borrowers seeking housing finance will now need to demonstrate that they are able to meet higher repayments when interest rates are assessed at least 3 per cent higher than the actual loan interest rate. This assessed rate, also called the buffer, floor, or serviceability rate was reduced to 2.5 per cent above the standard variable after the pandemic hit. This low-interest rate and easier access to finance is probably the main contributor to the skyrocketing house price we are seeing nationally, and especially in desirable lifestyle destinations like Byron Bay.

The unintended consequence is this will hurt entry-level, families and mid-level house buyers more than the top end – where we are seeing most of the heated buying. It will also hinder downsizing and people wanting to move from empty nests. This is exactly the type of people who need to move on and free up mid-level housing for new buyers entering the market.

Most top-end buyers purchasing in this area are cash buyers who do not require bank finance. They are already at an advantage as buyers requiring a bank valuation are put to the back of the pack over offers that are unconditional upon finance. Again, this is a policy good in theory but bad in practice!