RBA ? Mortgages to be affordable with 4 % rise

Discussion in 'Property Market Economics' started by see_change, 8th Mar, 2014.

  1. see_change

    see_change Apprentice Timing Lord

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    Tried to find a link for this but couldn't .

    On ABC 24 this morning , there was a headline about the RBA putting in a restriction on mortgages only being given if people can prove they can afford a 4 % increase in interst rises . My understanding was that was being raised for discussion , rather than something claiming in .

    Was curious from the brokers here , what rate rises assumptions are already factored in , and what people feel would be the impact .

    My assumption was that it would cap rises for a while , but wouldn't trigger a collapse , however as it would make property less affordable it would lead to a rise in rents as those who couldn't buy might be competing for properties , maybe in nicer areas.

    It would potentially create a greater divide between those who have and the have nots.

    I wonder if it was a warning shot , but if it became under more serious consideration , it might trigger a mini boom as people race to lock in loans before the change . This did occure when rates where rising quickly in the late 80's as people raced to buy before rates went up even further .

    Cliff
     
  2. Jamie M

    Jamie M Mortgage Broker - Oz Wide

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    It varies between lenders but they usually add an extra 2% or so on top and take the repayments at P&I

    Some will also inflate the repayments on existing loans.

    Cheers

    Jamie
     
  3. Rolf Latham

    Rolf Latham Member

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    Im pretty sure the RBA is an independent body that can make recommendations on things like that.

    To take it that monetary policy will be tightened so that the cash rate is 200% higher than now, given our "interesting" economy means only one thing to me.

    The RBA wants to reign in property price growth caused by the lowering of rates.

    They arent going to bury the rest of the economy because one sector is left to market forces................but who really knows,we havent yet recovered from GFC v1.2

    ta
    rolf
     
  4. r3ckless

    r3ckless Member

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    When CBA did my borrowing capacity, they applied 1.5% buffer to the current rate I was seeking
     
  5. Andrew_A

    Andrew_A Buyers Agent

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    Probably not a bad thing to be looking for such ideas, seems like we have an economy tracking down slowly in the background and pockets of strength such as residential housing in our capitals. Perhaps it's just a case of needing more than the one tool (cash rate, cost of money) to handle the housing market.
     
  6. wategos

    wategos Member

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    Perhaps the additional interest rate buffer is also addressing the huge growth in interest only loans, which could be seen as a ticking time bomb.
     
  7. plusnq

    plusnq Member

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    I think it would cap credit growth in housing and therefore price growth. Less borrowers means less capital gains but probably higher rents over the longer term.
     
  8. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    Most lenders credit assessment for interest only loans actually has a higher bar than a P&I loan. The default behavior for an I/O loan is 5 years I/O then 25 years P&I. Most lenders assess these loans as 25 years P&I rather than 30 year P&I for a regular loan.

    I guess the RBA can make all the recommendations they like, but responsible lending legislation is already in place. Interpretation of that legislation is up to the lenders and enforceable by the regulators. The RBA sets monetary policy, not credit policy.

    I hope that by this comment the RBA is not suggesting rates should rise by 4%! Rates would be around 9% and the last time this occurred the economy almost ground to a halt in 2008. Simply put this sort of pricing for money would be an disaster for just about everyone.
     
  9. truong

    truong Member

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    Not what I've understood.

    Interest rate being the very blunt instrument that it is, surely the RBA has to look at ways to differentiate between sectors. By requiring housing loans to be calculated on higher rates, they're essentially putting a cap on housing inflation while still stimulating the rest of the economy.

    This would have the effect of reducing the need for a rate rise should property get too hot, to the benefit of borrowers who would see little change in loan repayments and spending power.

    Looks like the RBA is more interested in soft, flexible, indirect measures rather than potentially destructive decrees.

    http://www.theaustralian.com.au/nat...-loan-rate-test/story-fn59niix-1226848615874#

     
  10. see_change

    see_change Apprentice Timing Lord

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    So overall , apart from the group of people who like to take a riskier approach of pushing their borrowing capacity to the max , this might be a good idea for giving more stability to the housing market , by leveling out the peaks and troughs.

    The news spot I saw didn't mention 3 or 4 % options .

    I wonder in the current circumstances where they are using the property sector as one of the drivers to get the economy back on track , that a 3 % option might be the chosen path , with a proviso that there maybe more if it doesn't give the desired result .

    I wonder whether the FHO sector might be the sector most effected

    Cliff
     
  11. Richard Feynman

    Richard Feynman Mortgage Broker

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    Does this mean that, in cases when a lender assumes P&I repayments (I believe some of the less-conservative accept IO repayments), it'd be in your interest, if servicing was tight, to apply for a P&I loan, then switch to IO after it was funded.
     
  12. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    Essentially correct. When assessing serviceability lenders look at money coming in and how much is going out. A 25 year P&I amortization schedule has a higher outgoing than a 30 year P&I amortization schedule, thus an I/O loan costs more in cash-flow to the lenders thinking and as a result it reduces your affordability.

    With a few lenders the difference is fairly small. If you need to rely on this kind of trick to get the deal done then there probably need to be further consideration as to how affordable the deal is and some risk management measures taken.
     
  13. bumskins

    bumskins Member

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    I think they need to look at serviceability but also overall leverage.

    We already know the higher leveraged you are, the less options you have for obtaining credit. So this hurts the persons ability to refinance, couple this with any sort of softness or downturn and all those options dry up. This is what happened in the GFC.

    In the GFC for businesses that were highly leveraged, often they couldn't take advantage of falling interest rates, people just didn't want to lend to them.

    We saw something similar with residential where the LVR's banks were willing to lend dropped considerably.

    If you did have a downturn, which higher interest rates might bring on, its unlikely banks will let you refinance at the same terms.

    The reason 4% might also make sense is it could account for a few % rise in interest rates and a fall in earnings.
     
  14. gooram

    gooram Member

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  15. see_change

    see_change Apprentice Timing Lord

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    Thanks for that .

    Good to get the whole concept in perspective. Does sound like a much more sensible approach than cranking up interest rates which would cause pain for existing borrowers as well as limiting new loans .

    Cliff
     
  16. euro73

    euro73 Member

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    If an interventionist policy is developed, allowing the RBA to reduce rates without creating additional borrowing capacity and therefore acceleration in prices- it's much more likely to be around LVR's than DSR's. Although it could be a little of both.

    If they were to impose a 60% max LVR for non resident lending and add 25% to the stamp payable by non residents, and simultaneously restricted investors who own more than 2 properties to 80% LVR, for example... it would be a far more sensible way to achieve the outcome they wanted, as it would it would slow down the number of people paying "overs" and it would allow first home buyers with smaller deposits, to continue to have higher LVR loans available to them.

    In many countries around the world, non residents /non citizens are simply not allowed to purchase property. I'm not suggesting we go to that extreme, but if we adjust policy settings so that local buyers have an advantage ( or at least a chance) over nonresidents and repeat investors, then the market will even out in time... and that's good for everyone in the long term - banks, investors, first home buyers and the broader economy, as it allows the RBA to keep rates at low settings, keep the dollar down at 90C US, while also keeping the property market from going into bubble territory.

    This sort of prudent debate is long overdue. Australia isnt 6 ft tall and bullet proof, in spite of a 25 Year golden run. One day , like all economies, we will suffer a prolonged, bad recession and with house prices and debt levels at current levels, it would be irresponsible not to be considering some form of intervention that creates a slow down rather than a collapse, so that we have some chance of seeing the recession of without too much blood letting.


    Having said all of that, we always see sharp property surges after dramatic rate cuts, then it peters out. The mini boom in some parts of Sydney have already topped out and I wouldnt imagine this little run has alot of legs left in it
     
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  17. BayView

    BayView Member

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    The LVR is a good hedge too...the old days of only 80% lend (P&I only), with 20% plus costs in cash.
     
  18. see_change

    see_change Apprentice Timing Lord

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    On what basis do you say that ? We're keeping a close watch and not seeing any sign of a slow down in our area. ( upper north shore ) .

    Cliff
     
  19. Paul@PFI

    Paul@PFI Tax, SMSF & Planning

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    I believe you are confusing something out of context.

    The RBA encourages banks to review their credit exposure to various events. They like to feel that the banks can simulate the worst case events and the RBA can then reassure Treasury / Govt about its role.

    Media reports indicate the RBA recently asked Banks to perfom a "stress test model" on mortgages. The value of 4% above present levels was probably used. This was to idnetify the proportion of loans which may rise wll above incomes. Its less about a prediction as much as it is about credit problems and Banks then calling in loans. The RBA wants to make sure the banks have sufficient capital to hedge that event and its effect of lending multipliers. Its more a capital adequacy test than something about rates.
     
  20. see_change

    see_change Apprentice Timing Lord

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    Paul

    Did you read the linked article . It sounds like the RBA are considering options to slow the property market selectively , rather than the whole economy.

    Cliff