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Why APRA wants you to stop this obsession with property

As Australia embarks on take two of the post-covid re-opening sequence, focus is turning to reducing risk in our overheated housing market. ANNA HONG explains

IN A MOVE that surprised no one, Australia’s financial system regulator APRA took steps to cool the housing market on Wednesday.

The decision to tackle house prices with macro-prudential instead of monetary tools reflects the reality that we are still in a tentative economic situation despite rocketing house prices.

This week Australia edged towards take two of the post-covid, re-opening sequence.

NSW firmed up its re-opening date of October 11. Victoria pushed forward with a roadmap out of lockdown despite rising case numbers.

We are opening up just in time to face global supply chain issues that are already creating havoc — and may worsen with potential delivery strikes.

Against this backdrop of uncertainty, RBA governor Phil Lowe reiterated the central bank’s dovish stance earlier in the week.

His main objective was to reduce unemployment and boost wages and prices.

That leaves APRA with the heavy lifting on cooling the housing market.

Property obsession

Australia’s obsession with property certainly isn’t new.

We spend an average of 2.5 hours a week researching property — even when we’re not in the market, according to HSBC data from 2019:

That’s twice the time spent at the gym (1.08 hours) and three times as much as we talk to our parents (0.88 hours).

Under such benign housing credit conditions — low rates, greater certainty on repayments with the fixing of rates thanks to the Term Funding Facility, lockdowns coupled with income from JobKeeper — it’s not surprising that we’re ploughing money into property.

On Wednesday APRA sent a letter to the banks, instructing them to increase the minimum interest rate buffer applied to new home loan applications.

The serviceability buffer will increase from 2.5 per cent to 3 per cent.

“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building,” said APRA chairman Wayne Byres.

APRA wants to reduce maximum borrowing capacity, since a fifth of new loans now have more than a 6:1 ratio of debt-to-income, as this NAB chart shows:

The implications

This increase in serviceability buffer reduces the borrowing capacity of borrowers by 5 to 6 per cent, again shown in this NAB chart:

Only time will tell if the latest measures put a dent in the housing market.

History has shown these may be mere bumps in the road instead of a large-scale correction.

But it’s just the first shot across the bow from APRA.

About Anna Hong and Pendal’s Income and Fixed Interest team

Anna Hong is an assistant portfolio manager with Pendal’s Income and Fixed Interest team.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.

With the goal of building the most defensive line of funds in Australia, the team oversees A$22 billion invested across income, composite, pure alpha, global and Australian government strategies.

Find out more about Pendal’s fixed interest strategies here

About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at October 8, 2021.

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