Why the interest rate buffer increase is a problem

Recently the Australian Prudential Regulation Authority (APRA) announced a change to tighten lending standards in a move to tackle high debt home loans and house price inflation that will come into effect very soon.

Don’t worry, interest rates aren’t rising yet. However, their solution is to adjust the interest rate buffer – the measure by which banks assess a person’s ability to repay their loan, factoring in future rate rises, prior to their loan being approved. The buffer is being increased to 3%, up from 2.5%, on top of the current interest rate. This means a person being assessed for a new loan needs to be able to prove they can afford the repayments on for example 5% interest when they only will be charged 2% initially. This may prevent many people from being able to enter or move in the current market.

In an article by Urban Developer, “APRA’s data shows one-in-five households is borrowing up to six times their income to buy a house, which presents significant exposure for banking institutions if interest rates go up ahead of the central bank’s forecast of 2024.”

We don’t believe interest rates will rise early as the economy still needs to correct from the impacts of COVID and a rate rise would not be supportive of that effort.

While we recognise there is a housing issue at present, we do not agree that this interest rate buffer is the way to address it. This will not solve the inherent issue which is affordability affected by a lack of housing supply.

Supply-side issues cannot be solved by demand-side solutions.

When we look at the issue of how we got to this point of incredible housing inflation it’s important to recognise that this is not simply ‘a COVID issue’, rather it came about from an increase in the undersupply of new properties brought about by macroprudential regulation in 2018 and 2019.  So why do some think another macroprudential change will solve the issue now?

These broad-brush approaches often have unintended consequences. In the case of the Sunshine Coast, this change in buffer rate has a great impact on first home buyers and investors – the two prominent groups currently involved in the rental crisis we are now experiencing with essentially 0% vacancy and growing rental prices. Want-to-be first home buyers who can’t buy will remain in rentals and fewer investors will be able to borrow to provide properties for other people to rent. With more demand for rentals and less ability to supply more rentals, the crisis is exacerbated.

Additionally, with this buffer rate change applicable across the country, we will likely see interstate buyers eyeing off the Sunshine Coast for their next home purchase. With higher wages in places such as Sydney and Melbourne and comparatively lower home prices on the Sunshine Coast, the opportunity of more affordable property purchases that will satisfy the increased interest buffer rate will likely see more inter-state investment and movement.

This increase in demand from out-of-region buyers without a solution for our supply issues will add more fuel to the fire that is the Sunshine Coast housing crisis. The imbalance of supply and demand pushes prices up even higher as those who can, compete for the small number of properties available to buy or rent.

From a broader perspective, the current supply issues across the country and low vacancy rates mean we need more investment properties in many locations. With investment lending already roughly one-third below normal levels as a percentage of all mortgage lending, this change could further reduce investment activity and further add to the undersupply of affordable accommodation. The affordability issue continues, and APRA’s concerns are not resolved.

So, what should be done? Focus on resolving the supply side issues to enable the market to balance itself, making housing more affordable and supportive of a growing economy that sees wages increase and debt to income ratios improve. This should result in a win for renters, homeowners, banks, and the APRA.

Solutions on the supply side can start with conversations with decision-makers about increasing building approvals for suitable and sustainable development, smart infill developments, and reduced red tape for developers and investors to provide more affordable homes for those looking to rent and buy. We need the decision-makers to recognise the actual demand and the actual supply to be able to address the real issues. We also need government support to improve the supply chain issues currently experienced by the construction industry.

Let’s get those robust conversations happening to incite real change that matters. The answer is simple, but the execution is hard. Does anyone with the ability to make these changes have the courage to do what is right over what is easy? Time will tell.

If you would like to understand what this change means for you and your property and wealth journey, book a free strategy consultation with our property coaches. Click here to connect with us.