The latest regulatory attempt to tighten lending standards is unlikely to stop the climb of house prices. It is hardly scratching the surface of the housing affordability problem.
The Australian Prudential Regulation Authority increased the interest rate buffer by 0.5 percentage point to 3%. Which means, by the end of this month, lenders will start assessing borrowers’ ability to meet their repayments at 3 percentage points above the loan product rate. This move aims to address the growing financial risks of borrowers taking in high-debt home loans.
The new buffer did not dampen demand for housing
It’s the second week of October and people are celebrating the arrival of spring by buying more properties as restrictions ease and consumer confidence grows. It seems this weekend, auctions will be packed.
Nearly 2800 dwellings are scheduled for auction this weekend – an increase of 40% from the previous week. In particular, Melbourne’s auctions are up more than 60%, Sydney and Brisbane auctions continue to grow.
Damien Cooley, managing director of Cooley Auctions, says: “There is no sign of the market slowing down.”
According to Cooley, in the last 12 months, clearance rates have increased by more than 23% to 84%. The number of registered bidders and bids have both doubled.
Top-end buyers are unaffected by the regulatory change
Cashed-up buyers are betting on the scarcity of properties now more than ever, particularly in the most exclusive postcodes.
We are seeing property values soaring to new heights. According to Canstar, during the past 3 months, the median Sydney property value increased by more than 6% to $1.3m. In Canberra, the median house price rose 7.5% to $956,000.
“I’ve never seen such levels of conspicuous affluence.“ says Emma Bloom, a director of Morrell & Koren, which deals in prestigious properties
“Some buyers want two properties at once – one for the city and a country, or seaside getaway. Then they ask for an interim property while we find what they want.”
Buffer is only a setback for some
It’s a tough pill to swallow for first home buyers who are dipping their naked toe into the property market. The new buffer rate has reduced their borrowing capacity in a market where prices are soaring beyond reach. Gone are the days of buying a property as a single person on an average income, even zero debts.
Only young buyers can tell you about the weird and rather frustrating balance between saving for a house deposit and needing to pay the bills, and we haven’t even factored in HECS debt.
“Especially newly graduated professionals with a HECS debt, who already carry what is colloquially called “the single tax” where rates, strata, internet, water, and power bills are much the same for one person as two but with only one wage to cover it all,” says Rebecca Tarrett-Dalton, director of Two Red Shoes, a boutique mortgage broker.
So here it goes. Get used to disappointment. Get used to finding your dream home, only to arrive at the auction and see 100 keen bidders with bigger deposits and higher appetite for debt, all holding their paperwork ready for move-in day.
Housing inequality remains
The rising housing costs coupled with housing policies that favours the wealthy are leaving the young and the poor behind. The share of Australians who own their homes is expected to fall in the decades ahead. This will lead to even higher inequality in the future. Children who are privileged enough to have access to the bank of mum and dad will be able to break into the housing market. The rest will probably have to rely on some kind of divine miracle.