Cutting interest rates is just the start. It’s about to become much, much easier to borrow via @ConversationEDU

Australia’s lowest ever Reserve Bank cash rate – 1.5% – is about to be consigned to history.

On Tuesday Governor Philip Lowe made it clear he plans to cut it in two weeks’ time. The money market cash rate (from which all other rates derive) will then fall to 1.25%.

After that, if betting in the market is right, he will cut the cash rate to just 1% by Christmas.

Speaking in Brisbane, Lowe said the Reserve Bank board was of the view that:

inflation was likely to remain low relative to the target, and that a decrease in the cash rate would likely be appropriate.

A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at its meeting in two weeks’ time the board would consider the case for lower interest rates.

The bank is forecasting a tick up in economic growth from the present 2.3% to 2.75% by the end of the year and a fairly steady unemployment rate.

But here’s the thing. He was keen to emphasise that those forecasts only applied if he cut rates twice this year – that’s twice, before the end of the year.

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He is planning to do it because the economy is weak, much weaker than his political masters suggested during the election campaign. Consumer spending is “unusually soft”.

Over the past three years, household disposable income has increased at an average rate of just 2¾ per cent. This compares with an average of 6 per cent over the preceding decade.

As this period of weak income growth has persisted, it has become harder for households to dismiss it as just a temporary development – as something that will pass quickly. The lower rate of income growth has also made it harder for households to pay down debt. The end result has been that many people have decided to adjust their spending plans.

The cuts are just the start

It isn’t much good cutting interest rates if mortgage rates don’t follow. That will be up to the banks. But until this week, even if they had passed it on, there would have been so many would-be borrowers it wouldn’t have helped.

That’s because, whatever the interest rate and whatever a would-be borrower’s ability to make payments, banks have generally refused to lend to anyone who couldn’t cope with a rate of 7.25%.

It’s been the doing of the Australian Prudential Regulation Authority – one of the Reserve Bank’s sister organisations. It regulates banks and super funds and other institutions in order to keep the financial system stable.

In December 2014 it directed the institutions it supervises to impose serviceability assessments that incorporated a buffer of at least two percentage points above the loan product rate they were offering and a minimum floor rate of at least 7%.

That meant that if new mortgage rates were 5%, as they were at the time, the lenders had to satisfy themselves that the borrower could cope with 7%. As new mortgage rates fell to 4.5% they still had to satisfy themselves that the borrower could cope with 7%.

Banks have needed unreasonably high buffers

APRA’s directive stated that “prudent practice would be to maintain a buffer and floor rate comfortably above these levels”, meaning that in practice most lenders wouldn’t lend to anyone who wasn’t able to cope with the mortgage rate climbing to 7.25%, no matter how unlikely that was becoming.

On Tuesday this week, a few hours before Governor Lowe delivered his speech, it wrote to the institutions again, telling them that

the low interest rate environment is now expected to persist for longer than originally envisaged. This may mean that the gap between actual rates paid and the floor rate may become unnecessarily wide.

It was proposing to remove “reference to a specific 7% floor”.

The required serviceability buffer would climb from 2% to 2.5%, and it would no longer expect lenders to use a rate “comfortably above” that buffer.

Soon, they’ll be able to lend more…

While strictly speaking the letter notified lenders of a one-month consultation period, what it really did was notify them that the changes were about to be implemented.

In recent months most new mortgage rates have been below 4.5%, with some high-quality borrowers able to get rates as low as 3.6%.

The new arrangements will allow banks to assess them on their ability to make payments on a 6% to 7% loan instead of a 7.25% loan.

Should the next two cash rate cuts be passed on, it would allow them to assess lenders on their ability to repay a 5.5% to 6.5% loan.

It would represent a substantial easing of credit standards for new borrowers.

..up to 10% more

My calculations suggest it would increase the borrowing capacity of home buyers by as much as 10%, enough to have a material positive impact on the housing market.

APRA’s move (almost certainly taken in consultation with the Reserve Bank) both makes a cut in the Reserve Banks’s cash rate less imperative and more potent.

As interest rates get lower, further cuts seem to have been losing their ability to get people and businesses spending and borrowing, something the Governor would have been thinking of when he referred in his speech to the “limitations” of relying on just one instrument to boost the economy.

It would also be up to the government to provide “additional fiscal support” (which means extra spending or tax cuts) including through spending on infrastructure and “policies that support firms expanding, investing and employing people”.

The first of his rate cuts, due in a fortnight, will have more impact than it would have had APRA not acted.

Or perhaps not as much as he would have hoped if the banks, carrying big costs as a result of the misdeeds uncovered in the royal commission, don’t pass it all on.

Source: The Conversation

How large a deposit should first-home buyers have under new government scheme? via @YourMortgageAu

The government's plan to help first-home buyers break into the market by lowering the required deposit amount is believed by many to be a step towards achieving affordability. With current house prices on a downtrend, how much do these buyers have to shell out for a deposit?

Under the First Home Loan Deposit Scheme, first-home buyers who are struggling to reach the 20% deposit requirement by lenders will be given a chance to apply for a home loan with a down payment of as little as 5%. The scheme will start by January 2020 and will be available to single first-home buyers earning up to $125,000 annually and couples taking home up to $200,000 per year. The government plans to help around 10,000 first-home buyers annually with the scheme.

With the current deposit adjustments, how much do first-home buyers in each capital market have to shell out initially to enter the housing market?

Dwelling values across Australia maintained their downward trend in April, falling by 0.5% on a month-on-month basis and 8.4% on an annual basis in April. These figures are according to the latest housing figures by CoreLogic.

Using CoreLogic's April median housing data, the capital city where first-home buyers need to save the least for a home deposit is Darwin, which has a median value of $390,621. This means that first-home buyers would only need to shell out around $19,500 for their initial deposit under the scheme.

Sydney remained the most expensive capital city for dwellings, recording a median value of $780,672 — considering this, qualified first-home buyers will need to pay roughly $39,000 for their deposit if they want to buy a house in the city.

The table below shows how much a 5% and 20% deposit requirement in each capital city would cost eligible first-home buyers:


Typically, home buyers with less than 20% deposit would be required by financial institutions to pay the lender's mortgage insurance, a policy that protects banks in case borrowers default on their mortgages.

With the scheme, however, the government will underwrite their home loans and will serve as the guarantor.

Beneficiaries of the scheme will be able to receive support from the program for the life of the loan or until the mortgage is refinanced.

Source: Your Mortgage

Real estate sector 'turns on dime' as housing prospects lift via @TheAge

The outlook for Australia’s property developers has "turned on a dime" following the weekend's shock election result and dramatic interventions from the Reserve Bank and the banking regulator.

Big developers like ASX-listed Stockland, which a week ago were anxiously eyeing the housing downturn, are now facing starkly different conditions according to analysts.

Reserve Bank governor Philip Lowe, in a speech in Brisbane, says the RBA will "consider the case for lower interest rates" when it meets in June.

Experts predict the re-elected Coalition's new First Home Buyer Deposit Scheme, proposed changes to the interest rate stress test for borrowers and the RBA's indication it may lower interest rates would all help underpin the property market.

On Tuesday the Australian Prudential Regulatory Authorities' signalled it would likely remove a requirement for banks to assess a borrowers' ability to repay a loan if interest rates rose to 7 per cent.

"Turns on a dime," Macquarie analysts said of Stockland's prospects in the new environment.

"Whilst there is likely to still be near-term attention on defaults, we believe [buyers'] ability to settle will also improve in light of a potential increase in borrowing capacity."

Property Developer Nigel Satterley has welcomed APRA's action.

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Property Developer Nigel Satterley has welcomed APRA's action.CREDIT:PAT SCALA

Perth-based Nigel Satterley, who runs the country's biggest private land developer Satterley Property Group, agreed, saying APRA's proposal would give confidence and certainty to the sector.

Mr Satterley said he and other developers had met with APRA officials to discuss its proposal.

"Banks are telling us they are in a strong position to lend to creditworthy customers," Mr Satterley said. "Early modelling is indicating people can borrow $40,000 to $50,000 more."

Deutsche Bank banking analyst Matthew Wilson said the relaxation in lending standards was an instructive turnaround from APRA, which in January had said measures to maintain mortgage lending standards were “designed to be permanent.”

The market will likely embrace the signal with gusto, whilst the taxpayer will incur the moral hazard.

"APRA is now showing a willingness to fold and consider 'unnatural acts'. The market will likely embrace the signal with gusto, whilst the taxpayer will incur the moral hazard," Mr Wilson wrote.

Stockland managing director Mark Steinert said credit was the lifeblood of the economy, but over the last 18 months it has become increasingly hard to access for everyday Australians.

"This announcement provides a much needed boost for the housing market and the broader economy, and gives more people the opportunity to realise the dream of home ownership," he said.

APRA's move would go further than just deepening borrowers' pockets, said Citi, who noted only a small cohort of borrowers take loans up to their maximum capacity.

"More meaningful is the flow-on impact to confidence. Upgraders and investors alike may be spurred to increase their loan size still within the increased capacity, bringing more firepower to asset markets," Citi analysts said.

The prospect of cash rate cuts by the Reserve Bank this year could accelerate any lift in confidence, they said.

Sydney-based developer, Crown Group chairman and chief executive, Iwan Sunito said he expected a lift in confidence and a surge in buyers.

Treasurer Josh Frydenberg and Prime Minister Scott Morrison at leave the Reserve Bank after meeting governor Philip Lowe on Wednesday.

"The fundamentals in the Australian economy are sound – economic growth is solid, interest rates and inflation are low, unemployment is low – so greater flexibility by lenders will make a big difference to property buyers’ decisions to purchase this year," he said.

APRA's proposed change "clearly reduces the downside risks to housing activity" and is likely to put a bottom under house price falls this year, according to UBS analysts.

The construction sector is also hoping the changes will create new demand, a time when data reveals the industry has hit a slump.

In the March quarter, residential building fell by 2.5 per cent and was down 3.2 per cent over the year, according to the Australian Bureau of Statistics. Alterations and additions fell by 4.4 per cent in the quarter, while new residential work fell by 2.3 per cent.

Craig James, chief economist, CommSec said builders and developers need to watch fluctuating activity levels across regions while at the same time taking action to trim costs where possible.

Shane Garrett, Master Builders Australia’s chief economist, said despite the fact that Australia’s population expanded by almost 400,000 during the past 12 months, fewer new homes are being built due to the negative impact of micro-factors including the slow motion credit environment following the Hayne royal commission.

"We look forward to the quick implementation of the government’s election pledges around First Home Buyer home loans and support for small businesses," Mr Garrett said.

Source: The Age

Sydney property prices to rise by end of 2019, analysts predict via @abcnews

Leading property analysts believe the Sydney market will bottom out by spring and hit positive territory by the end of the year, on the back of a "confidence boost" from the Coalition's surprise election victory.

Key points:

  • Sydney prices have dropped 14.5 per cent from 2017 peaks, and further falls are expected this year

  • Analysts say the "bottom" will now come sooner than expected, with prices turning positive by the end of the year

  • But property analysts say there are many factors that need to align for the market to turn significantly

Forecasts for Sydney's property market, which has dropped 14.5 per cent since its 2017 peak, had outlined falls due to market softness and uncertainty around Labor's proposed negative-gearing policy.

However, the coalition's surprise victory on Saturday came as the Reserve Bank yesterday gave its strongest indication yet an interest rate cut will come in June.

It came as the Australian Prudential Regulation Authority (APRA), the banking regulator, yesterdayproposed a relaxation of lending restrictions.

Property analysts told the ABC it was likely to bring back confidence to the Sydney market, with prices "bottoming" by spring and moving into positive territory by the end of the year.

One analyst went as far to suggest the three elements together — along with the "negligible" effect of the Coalition's first homebuyers scheme— may trigger an "unwelcome new boom" in Sydney as starved property speculators jumped back into the market.

"Before the election it was clear buyers were sitting on their hands," SQM Research chief executive Louis Christopher said.

"I was attending a lot of auctions in Sydney and there was lots of uncertainty, and we had a very low number of listings.

"With the election we were predicting a return of confidence just if the Coalition was re-elected, so the combination of these other factors this week has been a boost to forecasts."

Sydney's average house price — which was once well above $1 million — is sitting at $880,369, according to CoreLogic's April data, with unit prices sitting at $683,739.

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Prices are at their lowest levels since 2017.

The new conversation around interest rates, which have been held on a record low of 1.5 per cent since the last cut in August 2016, is seen as one of the many factors behind the predicted confidence boost.

A 25-basis-point cut in June — as flagged by Governor Philip Lowe yesterday — would take the RBA's cash rate target to a record low of 1.25 per cent.

APRA's plan to loosen requirements for banks to use a minimum 7 per cent interest rate when assessing borrowers' ability to service loans will represent a substantial easing of credit standards for new borrowers, analysts predict.

Mr Christopher said although there were lots of "ifs", such as whether the banks would pass on the interest rate reduction, this week's combination of factors should trickle down into Sydney's lethargic property market.

"The expectation is that we will bottom out soon in Sydney, around the September quarter, with prices turning positive by the end of the year," he said.

"It may even end up with an unwelcome new boom in Sydney, but there are a lot of 'ifs' still to play out."

This was backed by My Housing Market chief economist Andrew Wilson.

Mr Wilson said the policies and the Coalition's victory would eventually create a "more rational" view of the property market.

"We were already starting to see green shoots," Mr Wilson, an independent commentator and former chief economist at Domain, said.

"There was no doubt that [auction] clearance rates were trending up and pricing models were showing a slowing in the rate of decline.

"But we're coming off a very low base and there is an extremely low rate of property on sale in the market."

Mr Wilson said he was taking a "wait and see" approach over the coming months.

"We've got peak supply of apartments right now, there's lots for sale out there," he said.

"And the cutting of rates is always a double-edged edged sword — it's a positive for housing affordability but signals a growing concern over the state of the economy.


Treasurer backs banking regulator's plan to scrap key home loan rule via @theage

Treasurer Josh Frydenberg has highlighted the "social responsibility" of banks to lend money as he backed a plan by the financial regulator that will lift the maximum amount of money a home buyer can borrow.

Fresh from a meeting he and Prime Minister Scott Morrison had with top officials from the Reserve Bank and the Australian Prudential Regulation Authority (APRA), Mr Frydenberg on Wednesday also acknowledged the "headwinds" facing the economy, including from the housing slump, but argued his planned tax cuts could help boost growth.

Treasurer Josh Frydenberg and Prime Minister Scott Morrison as they left the Reserve Bank following their meeting with governor Philip Lowe on Wednesday. CREDIT:PETER RAE

Speaking at the Stockbrokers and Financial Advisers Association conference in Sydney,  Mr Frydenberg welcomed APRA's plan, announced on Tuesday, to scrap a rule that has meant banks assess how new customers would cope if interest rates rose to 7.25 per cent, which is much higher than current rates.

“That’s a positive development. I think that will continue to spur lending,” Mr Frydenberg said.

Slower credit growth and falling house prices are forecast to slow the economy via weaker residential building investment. Mr Frydenberg acknowledged banks had become more risk averse, in part as a result of the banking royal commission. But he said that with the royal commission and the election now behind us, the sector had an opportunity to lend.

“The banks now have an opportunity to continue to provide the capital flows into the economy – that is their economic and their social responsibility. But they’re businesses, and they have to do all the appropriate credit checks and they have to make decisions that are in the best interests of their business. "

But at the same time, it’s important that the credit continues to flow in the economy, both to households and to businesses,” he said.

With housing slowing and dragging on growth, and interest rates on many loans below 4 per cent, the APRA on Tuesday proposed getting rid of the 7.25 per cent rule, and instead requiring banks to assess customers on the basis of a 2.5 per cent lift in rates from current levels.

Shares in property developers rose on Wednesday on speculation APRA's move would bolster demand, with Stockland up 3.3 per cent to $4.40 by early afternoon. Building materials firms also enjoyed a bounce. Shares in CSR rose 4.8 per cent to $3.86, and Boral was up 3.1 per cent to $5.15.

Analysts predicted the change would lift the maximum amount an average household could borrow by tens of thousands of dollars, at a time when the RBA is also widely expected to cut interest rates to new record lows in an attempt to lift inflation and strenghten the labour market.

Mr Frydenberg's meeting with the country's powerful financial regulators and central bankers comes after RBA governor Philip Lowe on Tuesday said the board would next month consider cutting interest rates, which markets took to mean such a change is all but certain.

Dr Lowe also said the economy needed support from the federal budget, from infrastructure spending and other reforms that encourage business investment.

Mr Frydenberg said his discussion with the RBA and APRA had focused on both the challenges and the opportunities facing the Australian economy.

While drought, floods, housing and trade wars were dragging on activity, he said the opportunities included tax relief, infrastructure spending and the government's skills package in the budget.

“They’re the things that drive productivity gains, and in turn economic growth and more jobs. The [RBA} governor and the government both understand, as he said publicly, the importance of this tax relief as a means of delivering more disposable income into the hands of Australians,” Mr Frydenberg said.

He said the government remained "absolutely committed" to its pledge to deliver a budget surplus over the coming financial year.