Will APRA's new lending restrictions cool the housing boom?

In recent months there's been a lot of discussion about whether or not the Australian Prudential Regulation Authority (APRA) would step in and make changes to lending practices in a move that could pump the brakes on the housing market. 

Last week, at a point where national property prices are up a whopping +20.3 per cent annually, they announced new measures to limit how much buyers will be able to borrow, and it's caused a bit of a stir. 

So will the new regulations spell the end of the property boom? Or is there enough momentum in the market to carry growth into 2022?

What changes has APRA announced?

From November, anybody looking to take out a home loan will be assessed against a 3.0 per cent interest rate buffer as opposed to the 2.5 per cent rate it's been until now.

Say you're looking at taking on a mortgage with a current interest rate of 2.0 per cent. The lender will then add on the buffer of 3.0 to calculate whether your current income will be enough to continue to make repayments if interest rates rise in the future. 

In this instance, even though you're applying for a home loan with a 2.0 per cent interest rate, the lender will assess whether you can pay back the amount you've borrowed at a rate of 5.0 per cent (2.0 plus the 3.0 buffer equals 5.0 per cent).

In practical terms, this means the maximum amount of money people can borrow will reduce. 

Will Ranken, OpenAgent's Chief of Home Ownership and previously Westpac's General Manager of Home Ownership, says the measures have been put into place to safeguard buyers in the long run as well as keep the market in check.

"It's seen as a way of moderating house price growth as well as protecting customers, stopping them from getting into significant amounts of debt," he explains. 

How will this affect sellers and buyers?

One of the key questions being asked is, will this hurt anybody who's participating in the market, and will that hurt be significant? 

As Mr Ranken sees it, first home buyers are the main group who might feel the pinch from APRA's changes since they're the most likely to be borrowing right up to the limit.

"Those people who are looking to borrow at their absolute maximum, it's going to impact them," he says.

That tends to be first home buyers for a couple of reasons. Firstly, with property prices so high, they're likely to extend themselves as much as possible to break into the market. 

Secondly, Mr Ranken says "first home buyers are younger and they see their income more likely to change by a material amount over a short period of time."

That means that, even if they're pushed to the limit by what they can afford today, many of them can expect promotions and pay increases in the near future that will allow them to handle any potential interest rate increases as they come.

Despite that, he suggests that it's only a small portion of customers who borrow to that maximum, so the pain shouldn't be felt too widely. 

"It wasn't that long ago that people were being serviced at that effective [3.0 per cent] rate anyway," he says. "So the actual maths isn't something taking us back to the dark ages, it's just taking some of the frothier end out of the lending."

Will these measures wind back price growth and buyer demand?

The news of APRA's changes has concerned some sellers who expect that any new restrictions around lending could stunt growth, but Mr Ranken says there's no cause for alarm. 

"I don't think it'll have a measurable impact on demand," he explains. 

"Stock levels generally in the market are very very low, days on market are very very low, so it still remains, I think, overall a seller's market."

He also points out that "a lot of sellers are also buyers, so it potentially helps them on the other side in that sense."

Given those fundamentals around the continuing imbalance between supply and demand, it's unlikely that there will be a big impact on property prices either. 

"I think we'll see a level of growth going forward," he says. "I don't think anybody realistically wants to see the 20 per cent year-on-year growth that we've seen recently, so it will moderate that growth, but it won't take it down."

Ultimately, while APRA's move may ease things slightly, it's very unlikely to cause any sudden changes in the market. 

What is APRA's role in the property market anyway?

Essentially, APRA exists to protect the finances of everyday Australians. A prime example of that is to ensure banks, where Australians house their savings, lend that money out in a responsible way. 

Mr Ranken explains that, when it comes to real estate, APRA plays a role in adjusting lending standards as a way to moderate the housing market. 

"It's important for them to monitor [the market] and make sure that they're very happy with the lending standards, such that a shock to the house prices isn't going to adversely affect depositors' funds," he says.

For example, in 2015 APRA identified a risk in the high rate at which lending to investors was growing and decided to step in, effectively putting a cap on how much lenders could extend their books. 

Mr Ranken notes this had a range of unintended consequences, and in 2021 APRA have approached things with more consultation and consideration to ensure the market remains fair for all involved. 

So what's next?

While this is the first time APRA has intervened in the current housing boom, it may just be the first step. 

Mr Ranken explains that they'll have a range of options available to them, and when deciding which lever they might pull next, it's likely they'll look to protect first home buyers and owner-occupiers.

"One of the things they could look at again is zeroing in on the investor cohort," he says. 

"Obviously, that is helpful because it seems to protect owner-occupiers and first home buyers, so you could probably expect to see another angle around investors."

He also suggests that they could look at some kind of cap on debt-to-income lending to avoid people overextending themselves, although he admits that's somewhat of a blunt instrument.

Whatever happens, he says that "having been close to it for a couple of years, I have a lot of confidence that when they pull these levers they've thought through it."

In any case, the changes announced this month should only have a moderate impact on things, and the strong selling conditions we've been seeing throughout 2021 won't be drying up overnight.