As a property Buyers’ Agent I have to keep an eye on a lot of factors that affect the property market and prices, including economic factors.
One of my industry colleagues, Simon Pressley who is also an economist, shared an interesting graph with me recently and it was a real eye opener.
But first a little background. We hear a lot in the media about the cash rate and interest rates. These 2 rates are not the same so let’s break them down.
The cash rate is determined by the Reserve Bank of Australia. This is the over night money market interest rate, or what RBA charges the commercial banks to borrow money from them. It is one of the main monetary policy mechanisms that the RBA has to influence the economy. Currently that rate is 1.5% and has remained unchanged since August 2016. It actually hasn’t risen since October 2010.
The banks also get their money from other sources and those rates can vary which is why we have seen the interest rates for some lenders rise independent of the cash rate.
So the banks borrow money and pay a rate then add their profit margin on top and sell their money to you and I. That is the borrower’s rate, or what we commonly see advertised as a home loan interest rate. Currently that is around 3.8% for home buyers.
Whilst we might feel a bit jaded when our interest rates go up, this isn’t having a huge impact on the property market.
A study release in January revealed 40% of home loan applications were rejected in December 2018 versus 8% in December 2017. 40%!! Why is this happening?
The highest impact has come from a dramatic increase in the assessment rates that lenders apply when checking a borrower’s capacity to borrow money.
The regulator, Australian Prudential Regulatory Authority (APRA), sets the assessment rate as a minimum standard for the lenders to use.
That’s the buffer they use to calculate if you could afford to repay your loan if interest rates go up. The guideline used to be a minimum of 2% above the home loan rate but in December 2014 APRA set the minimum to 7%. They did this in an attempt to enforce responsible lending practices within the banking industry that they oversee.
That means a lender who is offering you an interest rate of 4% is assessing whether you could afford to pay the loan repayments if interest rates went up to 7.25%. That is a whopping 13 interest rate rises!
With the RBA Governor Philip Lowe indicating that they will consider revising the cash rate down at their next meeting on 4th June 2019, the assessment rate is not only ludicrous, it is stifling the property market nationwide.
APRA achieved their goal of slowing the property market with their regulatory changes, but it is time to re-look at this policy in view of the alarming impact it is having on the property nationwide.
On Tuesday 21st May, APRA Chair Wayne Byres advised they have begun consulting on possible revisions to the assessment rate.
This will be welcome news to home buyers and investors who may have been rejected by lenders or limited in their borrowing capacity because of the overly onerous affordability assessment rate.
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