Housing market is turning already
"The potency of the RBA’s June cut will be amplified both by ScoMo’s economic agenda and APRA’s decision to change loan buffer rates."
In April we forecast that the housing correction was likely about to end, and there are now tentative signs that house prices are indeed starting to turn. The hedonic CoreLogic index, which revalues a portfolio of about 10 million properties each day, indicates that price falls have significantly decelerated – or stopped altogether – in Sydney, Melbourne and Brisbane in May.
If the Reserve Bank of Australia cuts its cash rate twice – with the first likely at its June meeting – I expect national house prices will climb at least 5 to 10 per cent over the 12 months following the final move.
My takeaway from the RBA’s latest board minutes was that the decision to pause in May was purely about avoiding politicising the central bank by influencing a federal election. The “jobs test” that governor Phil Lowe established after the May meeting – where the jobless rate had to drop materially to stave off a future cut – was not remotely satisfied by the latest data. The modest increase in the unemployment rate from a revised 5.1 per cent to 5.2 per cent was statistically insignificant and driven by a bump in folks looking for work.
Home borrowers set to receive $100,000 lending boost
"Home buyers are set to receive a borrowing boost in the order of $100,000 because of a combination of looming changes to lending standards and interest rate cuts, new modelling shows."
A single borrower with an annual income of $80,000, no other debts and average - or below - living expenses could today expect to be approved for a maximum loan amount of $512,000.
This would increase to $567,000 under the proposed relaxation of loan serviceability rules flagged by the banking regulator last week, according to modelling by Independent Mortgage Planners.
Combined with the defeat of Labor's negative gearing reforms and the Morrison government's new scheme to help first-time buyers, analysts have begun tipping an end to property price falls across Sydney and Melbourne.
"Combined, we think these events will lift sentiment – especially in the housing market," ANZ economists David Plank and Felicity Emmett, wrote in a note to clients on Friday.
Since 2014, lenders have been required by the Australian Prudential Regulation Authority to make sure potential borrowers can service their loan sizes at an interest rate of 7 per cent, with most lenders using a slightly higher test of 7.25 per cent.
The regulator now proposes borrowers be tested for their capacity to meet repayments at the prevailing mortgage rate - currently around 3.75 per cent - plus a buffer of 2.5 per cent.
That would result in an immediate relaxation in the serviceability test of 1 percentage point, from 7.25 per cent to 6.25 per cent. If the Reserve Bank also lowered interest rates by another half a percentage point, that would fall to 5.75 per cent - a full 1.5 percentage point below the current test.
Craig Morgan, the managing director of Independent Mortgage Planners, said the combination of rate cuts and rule changes could provide a significant boost to maximum borrowing limits.