May 27, 2019
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.
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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