The reality for APRA was that interest rates were not headed anywhere near 7% anytime soon. As a result, there was much to celebrate for both lenders and borrowers as APRA officially removed the 7% serviceability buffer that it had previously been requiring banks to assess borrowers against.

Interest rates have been falling sharply as the RBA has moved to aggressively cut rates at its last two policy meetings and as a result, there was growing pressure on the regulator start wining back some of the restrictions they were imposing on lenders.

In the past months, the official cash rate has fallen to 1.0% from 1.5%, with many economists pricing in a further 25 basis point cut in 2019. The huge differential between the OCR and the serviceability buffer rate was putting a handbrake on credit and adding to the property slowdown that we’ve seen in recent times.

APRA’s old policy will be replaced with a new process whereby banks will add 250 bps to the rate paid when assessing an applicant’s borrowing capacity. This is a very important step forward as it will enhance the stimulus provided by the RBA’s monetary policy easing and actually make cheaper loans available to more people seeking to purchase property in Australia.

The move means that people will actually be able to borrow the money they need to buy a house and that puts the onus back on the lender, which is realistically where it needs to be. This demonstrates a move back to responsible lending practices that are in line with where the market sits at the moment.

APRA originally introduced the serviceability guidance in December 2014 at a time when east coast property markets were just starting to heat up and Australia was seeing a huge influx of foreign capital. Particularly out of China. At that point in time, the official cash rate was at 2.5%, significantly higher than it is today. The move to drop the buffer rate had been flagged more than two months ago, however, lenders were forced to sit and wait while APRA finalised the details of how the minimum interest rate floor would be assessed in the current climate.

Since APRA introduced the servility buffer, housing conditions have naturally eased as we might expect during the course of any property cycle. However, it was clear to most lenders and property investors, that APRA wasn’t keeping pace with those developments.

For borrowers, the changes mean a significant increase in borrowing power. Analysis from UBS shows the impact the changes will have for an average Australian family earning a combined $200,000 per year. The new policy would increase their borrowing capacity from $1,097,000 to nearly $1,249,000, which is an increase of around 14% according to UBS.

Begrudgingly, APRA boss Wayne Byres did come out and say what we had all been thinking for some time.

“In the prevailing environment, a serviceability floor of more than 7% is higher than necessary for ADIs to maintain sound lending standards. Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,” said Byres.

Mr Byres stopped short of giving too much control back to the lenders and highlighted the fact there was still some risk present.

“With many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors. Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”

A Tax Boost to Boot

It has been a big week for property not just on the lending front, but also in terms of taxes as well.

On the back of a double RBA interest rate cut and the regulator removing the key serviceability handbrake as mentioned, we also saw the Government pass their tax-cut package that was outlined in the lead up to the Federal Election earlier this year.

The Government’s tax package will give middle income earners a tax saving of $1080-$1215 per year, which will grow to roughly $2,340 by 2024/5.

The move will potentially help first home buyers find their way back into the market and is clearly a positive for the economy. If you combine responsible lending standards with falling interest rates and add in the tax boost, it will likely see middle-income earners with average mortgages (approximately $500,000) around $3000-4000 per year better off than what they were only months ago – which is clearly a good thing.

Overall, this has been another good week for Australian property and one that will likely help improve sentiment in the short term. Now that we are moving back to responsible lending standards, we will hopefully see that positivity start to flow back into property markets across the country.