Buyers who could be impacted by a crackdown on highly indebted real estate loans


First-time homebuyers struggling to keep up with rapidly rising house prices could be caught off guard by tighter credit restrictions being considered to reduce housing market risks, experts say.

Homeowners looking to increase their size and investors with multiple properties could also reduce their borrowing power, as regulators consider measures to reduce the amount of debt owed by buyers.

With more than one in five buyers borrowing more than six times their income, regulators have had the opportunity to green light to crack down on high debt-to-income ratio loans by Treasurer Josh Frydenberg, and have confirmed that macroprudential measures are under consideration.

A tightening of loan restrictions was arguably overdue, said Shane Oliver, chief economist of AMP Capital, with home credit now growing faster than income and at a faster monthly rate than when the Australian Prudential Regulation Authority (APRA) last launched macroprudential controls in 2014. About 22 percent of new loans went to borrowers with debt-to-income ratios above six times in the June quarter, up from 14 percent two years ago.

However, any deployment of macroprudential controls – a “fantastic” term for measures to restrict credit flows – would be different from previous restrictions introduced to limit lending to investors and lending at interest only in 2014 and 2017, the Minister said. Dr Oliver, because it was now. less worrying.

“[Still] investors will be caught up [by measures to limit high debt-to-income ratios] because sometimes they are big borrowers [who] tend not to be so focused on paying back the principal [of a loan], and some investors may have multiple properties with higher debt-to-income ratios, ”he said.

“It could also have an impact on first-time home borrowers… and homeowners who take advantage of lower rates to borrow more; they may both find that they can be limited in terms of what they can borrow.

Controls could involve limiting the amount of money people can borrow, say six times their income, or limiting the proportion of new loans with higher debt-to-income or loan-to-value ratios, Dr Oliver said.

He suspected that measures to limit high ratios would largely target investors and be designed to have limited impact on first-time homebuyers, as was the case in New Zealand, where the Reserve Bank has recently been. empowered to limit high debt-to-income ratios. .

Another option would be to increase the interest rate cushion used to gauge people’s ability to repay their loans if rates rise from their all-time low – which has helped fuel buyer demand, pushing by following the rise in prices.

Limiting borrowing to less than six times income would put the median Sydney home price out of reach for the average New South Wales family and the median unit out of reach for singles, even if they had. a 20% deposit, modeled by shows.

In Melbourne, median house and unit prices would also be out of reach for those with a 10% deposit.

Gareth Aird, head of Australian economics at the Commonwealth Bank, said an increase in the interest rate sustainability assessment rate would be preferable to a debt-to-income ratio cap and would be a “cleaner way.” »Reduce people’s debt levels. took charge. That’s what the ABC chose to do in June, when it raised its mortgage interest rate cushion to 5.25% from 5.1%.

“Basically that will mean that the average buyer will be offered a little less money… and if everyone is offered a little less, it will have a chilling impact on prices,” he said.

There is a risk that a cap on the debt-to-income ratio will further reduce the activity of first-time homebuyers, Mr Aird said, as younger buyers were more willing to take on more debt to enter the market. as they expected. to see their income increase as their career progresses.

Meanwhile, investors might have an advantage as rental yields would be taken into account as income when determining their borrowing capacity.

Independent economist Saul Eslake said first-time homebuyers could be disproportionately affected by limits on loan-to-value and debt-to-income ratios, as they typically need to borrow more given the difficulty of putting together a deposit in a rapidly growing market.

Macroprudential measures should have been considered earlier, Mr Eslake said. While they were less likely to target investors this time around, it would be unfortunate if APRA did not reverse previous restrictions on these loans, given that the number of buying investors has exceeded the number of first-time buyers. property in recent months.

Better yet, he said, he would like governments to act on recommendations made by both the International Monetary Fund and the Organization for Economic Co-operation and Development to reduce tax benefits for investors to ease the burden. market – as well as other measures, including tightening credit restrictions.

“It is unfortunate that macroprudential measures may have a greater impact on first-time homebuyers than others, when it is really first-time homebuyers who need the help, but if the government is not ready to reverse investor tax breaks… can you do something else, ”he said, adding that it would be a mistake for the Reserve Bank to raise interest rates now to try to cool the market.

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