No doubt everyone is aware of the massive surprise at the recent federal election, where despite the market assuming labor as an absolute certainty to form government, it didn’t happen.
There are a few implications as a result. Further to this, there are a few things that have happened in the week since the election that you may not be aware of which is set to have a huge impact on both lending and the property market.
I thought I’d provide an update on the key changes and my opinion on the how it will play out. The big things are:
1. Government Policies
2. Reserve Bank Outlook
3. Proposed APRA Changes
1. Government Policies
The obvious one is that with the coalition continuing on as government it means that all of the existing negative gearing and capital gains tax changes that labor proposed, are off the table. Business as usual for existing and new investors.
One of the property related policies that was introduced at the election by the coalition was the “First Home Buyer Deposit Scheme”.
In essence how it will work is that it will allow first home buyers to purchase property with as little as a 5% deposit without having to pay lenders mortgage insurance which will save borrowers a significant amount of money and allow them to enter the market sooner.
Labor in principal supported this policy so my view is high chance it’ll be implemented, but no word on it being confirmed yet (possible implementation being talked about January 2020).
2. Reserve Bank Outlook – Interest Rates
The economic outlook has deteriorated both globally and locally in recent times. Locally we have seen economic growth drop below forecast and more recently seen unemployment increase, which mean the Reserve Bank of Australia (RBA) now look to cut the cash rate to stimulate the economy into further growth.
Some lenders like Westpac are predicting the RBA will cut rates 3 times in 2019. We can definitely see with the current state of low fixed rates that many lenders are confident that there will be at least one cut in the short term. The big question will be if all lenders pass it on in full, so I expect this will create opportunities for some looking for a better rate. We are very likely to see a rate drop as early as next week (June).
As a side note, unfortunately with all this, our currency has dropped significantly in value. Great for exports but not if you want to go abroad for a holiday!
3. APRA Changes – Assessment Rate
The key reason for the decline in the property market has been availability of credit. This came back to a change that APRA forced lenders to put in place where new loans need to be assessed at a 7%+ interest rate repayment (most lenders went with 7.25%, or +2.25% above actual rate). This assessment rate is commonly referred to as the floor.
Last week, APRA wrote to the banks to advise that they are going to no longer mandate a “floor” assessment rate and that lenders can set this themselves. They are proposing that there is a minimum +2.5% buffer put into place.
How will this work? So at the moment, an owner occupied loan of 3.70% is assessed at 7.25%. In the new world, at 3.70% + 2.5% buffer it will be assessed at 6.20%.
Furthermore, if we have two x 0.25% rate cuts by end of year and the APRA change is implemented this could look like 3.20% interest rate + 2.5% buffer = 5.70%.
How will this impact borrowing capacity? Here is an example using an example for a family living in Sydney buying an owner occupied property:
• Current Loan Limit (7.25%): $1.144m
• New Loan Limit (at 6.20%): $1.273m +11%
• New Loan Limit (at 5.70%): $1.344m +18%
Whilst it hasn’t been confirmed that this will be implemented, it looks likely that it will in a month or two and that the markets will benefit from increased levels of credit.
The outlook for the property market has had a complete reversal since prior to the election. Where it was looking like it would continue to have a prolonged decline, it now looks set to bounce back driven by a combination of the three drivers outlined above.
In my opinion, we’re likely to see confidence improve. This will encourage both people who have been waiting for better conditions to sell, and those looking to buy to get into the market via access to more & cheaper credit.
If there are any questions on anything covered above please don’t hesitate to get in contact!
Some links for further reading: