Interest Rate Prediction

After reading the RBA’s announcement from their Tuesday meeting there seems to Be a high chance of a rate cut coming up this year - have seen this mentioned on here too!

As a Broker I know how tight lending is with assessments rates sitting at 7.25%+. If there is a rate cut (passed on) it would seem logical to also cut assessment rates. Thoughts?

Longer term, there is a lot of talk that interest rates will remain quite low for the next 10-20 years. Obviously it’s hard to predict that far into the future but do you think APRA will loosen their view of assesment rates to allow them to be droppen to say 6%?

I’ve seen first hand how the 7.25% assessment rates are affecting first home buyers. Especially when those first home buyers may not ever see rates of 7.25% for their initial loan term. These assessment rates are certainly needed without a doubt but I believe 7.25% is just way too high.

Would love everyone’s thoughts on it?

 

@Redom and I have at various times over the past year or so discussed the possibility of a modest reduction to assessment rates... we both believe it could help cushion the massive P&I migration APRA is engineering without adding any risk to the system.... in my view it could in fact help keep the risk of increased delinquencies at bay and add value to the system..... but APRA's chairman has said as recently as last month that current assessment rates are here to stay ...so for the time being it would appear you need to refer to @Rolf Latham and his comments about snowballs and Mt Isa

 

Changing the floor assessment rate would be a massive massive move. It’s a fundamental structural change in one of our key pillars of financial stability. It’s also a signal to the broader market about the neutral level of interest rates over the cycle.

I’ve commented on it before, I think it would be in their toolkit of options, but only pulled out if it got really really dire. They’d much rather talk to lenders and get them making decisions quicker, better, more efficiently, etc. They’ll do what’s required here to open credit flows before drastic changes like this.

 

Unfortunately credit flows won’t assist borrowing capacity. Sydney and Melbourne - which represent a massive chunk of the national markets in volume and even more in dollar value , won’t stop correcting if loans get approved in 3 days instead of 10 days.

So while I agree that a reduction to assessment rates is unlikely .... I must admit that recently I’m beginning to think that maybe - just maybe - they may have to start considering having a chat with their pals over at APRA.

What’s making me start to think about that is the worrying picture forming month in and month out around falling retail spending and new car sales . car sales are declining almost as quickly as house prices .... it’s been quite a big drop off . We are also seeing house and land sales fall off a cliff in both major cities ..... and I really do mean a cliff. So that’s going to flow through to a lot of lost jobs at some point .... and it’s potentially going to get even worse when all those tradies working on apartments have their work dry up when the apartment cycle runs it’s course ... which ain’t that far away ...

So they may just have to do something about assessment rates .... but yes I agree it would be a big move .

 

I don't understand why the major banks have not at least dropped their assessment floor down to 7% as per bare minimum set out in APG223 if my memory serves. Or has this happened and i just haven't heard?

 

Posted this 4 months or so back along with another post re RBA at least cutting twice in 2019 and car sales off a cliff. So in the last 4,5,6 months the RBA has sat on their hands painting a pretty picture about the economy only now to say the economy is not doing as well as we thought.
How is it that having your ear to the ground these days is more valuable than what these book worm economists put out?

Melbourne price correction - post example

 

If the RBA cuts interest rates (and bank interest rates follow), does the chance of APRA dropping assessment rates also increase? An assessment rate stuck on ~7% is much harsher in an environment when actual interest rates are 3.5% compared with 4.5%.

 

Thanks Rolf,

I understand there are some non bank lenders that take actual repayments on existing debt and don’t assess assuming ~7%. I think Pepper and Liberty may be in that category.

 

And I called 2019 rate cuts 18 months ago, when everyone was saying the RBA would raise rates .

APRA had a difficult conundrum when they stepped in. They had to act to save the banks from themselves - but in doing so they have brought on some collateral damage . I think that was unavoidable given how far they let things get - although I would also say that this could have been avoided altogether had they and ASIC not been asleep at the wheel for so long RE living expenses and “actual” assessment rates . But they were - and the leash had to be pulled in

If I had to choose whether APRA should have acted or not - I’d go with YES . Left unchecked we’d be in a whole lot more trouble now ... but I also think there’s definitely a growing consensus that the leash could do with a little slack, now ... just a bit .... if for no other reason that to act as a cushion effect to get the whole P&I migration completed and keep delinquencies at bay...

Whether it will happen is a completely different conversation ... as @Redom has suggested , they are probably loathe to do so ...but I’m increasingly of the view that it’s starting to become something they should at least take a look at ... they can always lift it back to 7% in a few years time

This way , they’d arrest price declines without adding to asset prices , and it should have flow through to things like car sales etc ....

 

What about existing lending? Is that assessed at 7%??

 

But this conservatism really hurts the bottom line with credit flows as low as they are. The big 4 are itching to get more business through the door.

I'd say that the looming 25 basis point drop in the cash rate will be used as justification for the banks to drop their minimum assessment rates down to 7%, being considered more representative of a long term average in this lower rate environment of late. Meanwhile only passing on maybe 20-30 points reduction to their SVR of course.

 

So, if existing debts are based on actual repayments (and not ~7%) that would mean a large increase in servicability for an investor with a large existing portfolio compared with using a mainstream bank.

 

Thanks Rolf. Last time I did the calculation, I think 20% uplift on existing repayments was equivalent to about ~7% assessment rate on existing debts, so margin would need to be around 5-10% to give the borrowing some extra servicability v mainstream banks. Appreciate the response.