Drop in assessment rate ...

^^^^
The system needs some relief and I think RBA definitely and perhaps reluctantly APRA are starting to agree.

 

GIven that we used to be able to access 12-15 x income and can now access 6-7 x income, the post APRA calcs are far more conservative. The APRA chairman used 6 x income as the global standard in multiple speeches he made back in 2015 , and we have largely been at those levels now for @ 4 years . Are you suggesting they should be even more conservative, further driving prices down and impacting the broader economy?

 

Ultimately you can bet a penny to a pound that the RBA wants no further cuts, but because they cant get Canberra to provide any meaningful fiscal stimulus, they are hand tied. You can also bet a penny to a pound APRA would have been brought kicking and screaming to the table on this.... they would be loathe to make any stimulatory moves RE borrowing capacity, but the RBA would have talked them into it because without such a move their rate cuts (which they themselves are loathe to make) would be ineffective.

What we really need is wage growth

 

Hey all I’m asking for is a ** in people’s comments when they refer to credit returning to good old days

Maybe an update to the sig

 

yep wage growth and inflation to eat debts

 

Arrears & impaired is rising. I really doubt assessment rate will be reduced before major economy indicators are improved.

 

A couple of points:

Firstly including the IP holding costs in your wafer doesn't make sense since they do have to pay strata, etc. Also just claiming they could reduce their living costs by $500 a month is an assumption our banks and regulator definitely should not make (there are MANY circumstances where this won't end up being possible). If you want to be judged on particular living expenses you should have to prove you can live at that expense level. So the real buffer is $5622 which of course still sounds huge and if everything goes right they'll be absolutely fine.

But that $5000+ per month can be swallowed up pretty damn quickly if things go wrong. They have almost $12k per month in uncertain income from commission, overtime and rent. In even a minor economic slowdown it's that type of income that would go first. What happens if sales fall and his commission is cut to only $20k while she loses half her overtime? That buffer is basically gone without a single unforeseen expense popping up, nobody losing their job, no housing price crash and no change in interest rates from their historic lows.

If the last 15 years has taught us anything surely it's that big loans for housing can easily turn an external economic shock into a full blown economic crisis. That's when everyone suffers. So yeah I'm pretty comfortable with them not being allowed to massively leverage themselves with their uncertain income just so they can speculate on property prices. If they want to buy a house to live in then save for a few extra months and prove you can afford it. Or sell an investment property. Or at the very least give up the unnecessary credit card!

 

Yes they have to pay strata but my point was they have doubled up on the costs by already shading the rental income by 20 to 30% which is excessive for vacancies alone.

If people are declaring their true living expenses and they are well above poverty line then absolutely some costs can be shaved off the total as discretionary. Not every$1 is allocated to fixed costs. To say otherwise is childish.

$5000 / month can not be swallowed up pretty quickly. Sorry no way. A loan like this would not default. IT is here to stay and people keep getting sick. You are the type of person who tut tuts the lenders about their loose ways then gets the ***** when they apply their conservative policies to you or your children.

 

Its exactly why they need to pump prime. They have forced a large number of borrowers into a corner

 

The point is you double counted. The 20-30% is the buffer. The strata expenses are real and aren't part of the buffer.

Spoken like someone who's never experienced a downturn. IT sales with half my wage on commission is one of the last jobs I'd want to have if a recession hit. At best your commission would be crushed.

Haha you know nothing about me. My wife and I have decided to happily rent for the next little while (couple of years) at least. We went to the banks (CBA and bank first) somewhat out of interest and so we'd be ready to buy relatively quickly when we're ready. But the last thing I want to do is go in to debt that would mean we're walking a tight rope for 5-10 years. I'd hope my kids would be similarly careful with regards to debt. Not everyone wants to risk their financial security just so they can say they own a house.

 

Not really. 25%-30% is enough of a shading to allow for costs and vacancy risk. The lender doesn't take into account that the expenses are tax deductible or allow depreciation add back. It is therefore a conservative methodology to expense full holding costs and to take a large haircut on the income when it doesn't acknowledge the true cost of holding are less than face value.

I'm 46 and I was working in the early 1990's trading futures for JB Were and ANZ bank at the time so yes I remember that recession well. I also worked as a commission only mortgage broker during the GFC which was a recession for us I can assure you. I have also run my business through this current downturn. Lost of risks along the way.

I don't know you but I do know that you have no experience in lending / credit so debating me on this is insulting. What do you do for a living? maybe I could tell you how you should do it better.

 

Ease up mate. All I've done is point out that loan to income levels available in Australia are massive compared to the rest of the world. If you find it "insulting" that I might put my view across you're welcome to not reply. Nobody's forcing you to participate.

But if you're so inclined to continue the discussion can I ask why you think Australia allows people to borrow 7x their income (or more) while basically nowhere else in the western world allows similar? Is everywhere else just massively conservative in their lending standards? Are we different that we can afford the high loan levels (at higher interest rates) than other places? Why do you think that's the case?

And you're right I know nothing about the Australian credit and lending environment beyond what I look up myself. I'm not involved in it and I have no skin in the game. I'm just a humble physicist who's looked at Australia's level of household debt and, based on some basic maths, is worried by it.

 

In your hypothetical why can't the couple sell an IP to reduce their risk and get approval?

I was in IT during the GFC and was made redundant. A while later the business went up. What was worse was that no competitors were hiring as they went belly up too. I diverted out of IT for a couple of years before the industry recovered and got back in.

 

I don't think I've ever had a loan fail serviceability on the 'multiple of income' rule. They fail serviceability on the other metrics looong before the trigger that threshold. Most don't get to 6 x income, so yes, the other metrics tend to be conservative enough to be on par with the rest of the world. The Australian metrics are also based on measurable metrics, rather than a general rule of thumb which can be easily manipulated.

I was in IT before mortgage broking. Was made redundant in 2004 during the 'tech wreck'. There wasn't much work available then either and I spent several months looking for work before my career change. That was a tough time for a lot of IT workers.

 

Ok sorry bit too personal. I do think you are wrong though. The debt levels are high from past sins which is well a truely a thing of the past.

We don’t lend much over 5.5/ 6 times total income here now. This is before they shade the incomes. So with the shading it wouldn’t surprise me in the least if we would lend less than other jurisdictions now.

So in summary yes we lent more than others pre 2015. Now we lend less. Pendulum has swung too far and it is now overly restrictive. So much so that RBA is wanting APRA to loosen standards.

 

My example was just to highlight the buffers and haircuts that are inbuilt to the lending decision framework now. It was not an real scenario. Just an illustration that there is conservatism at every step.

As to IT any industry goes through woes again just an example. Besides essential services any industry can have a tough patch. Not all people employed in IT in 2004 or the gfc lost their jobs. Not all earned less commission. A lender should not really be making a call on the viability of a whole industry should they?Should lenders not consider any variable type income? Or should they take 50%? That would be incredibly restrictive. For every sad case I have 100 where people have got into their first homes and needed the variable part of their pay to service.

Having a good cash buffer in your offset and borrowing within your own means aka taking responsibility for your own decisions is still important!

 

Fair enough about your example.

I am not knowledgeable enough to say what is an appropriate methodology for assessing the security or value of different types of income. I just wanted to respond to your statement "IT is here to stay". You are not wrong in general but it's also an industry that has big swings in employment... now that I think about it I guess it could be compared to the construction industry.

Again I don't know what's fair or appropriate for assessing the numbers I expect you have more experience in this area than I.

 

Thanks, perhaps not the best example using IT as the industry but not sure a lender should discriminate against one industry over another unless there is an obvious risk in the sustainability of the persons ongoing income. FIFO mining workers in the height of the mining boom come to mind.

 

Pompous