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The home lending squeeze finally kicks in

Stephen Thaxter- Senior Partner and Principal Adviser

Sovereign Wealth Partners

With Australia’s house prices rising 20% over the last year, last week the bank lending regulator stepped in with tighter controls on interest serviceability for new home loans. Borrowers now need to demonstrate they can afford a 3% rise (previously 2.5%) in interest rates on top of the current level, which is around 2.5%.

APRA – the banking regulator – estimates that this tougher serviceability test will decrease typical borrowing capacity by 5% but it remains to be seen if it’s enough to cool the market or if additional measures will be needed.

More controls might well be needed, since the CBA reported that only 8% of its new recent lending was borrowed to serviceability limits under this particular test. The next weapon in APRA’s armoury is rumoured to be a limit on debt-to-income ratios. These have blown out dangerously – more than 20% of new lending in the June quarter exceeded 6 times household income.

We totally see the sense in squeezing lending standards at this point of the cycle. We believe that the biggest house price driver over the last 30 years has been the massive increase in borrowing capacity brought about by interest rate falls. But just as trees never reach the sky, the cycle always turns. A casual glance at the bond markets show that the price of money is on the way up again. All borrowers need to be very careful, but it’s sad that these new controls impact mostly our younger generation who are trying to get a foothold into the market.

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