Lending to become easier for Investors for the first time in 5 years

I'm definitely not a broker, but really for the life of me, I can't see the problem with relying on HEM or some other suitable expenses benchmark. As long as the benchmark is reasonable and fit for purpose (i.e. not unrealistically low), and the borrower is not declaring expenses above this level, what's the problem? A 3 month snapshot of a borrower's spending habits is pretty meaningless in the scheme of a 30 year loan contract.

 

I agree,
If there is a disparity what people really spend and what HEM say they do, revise it upward to make it realistic with margin of safety.

For those claiming less expense then what Revised HEM state, they should have option to get audited at micro level to prove their case.

For future stability rather then assuming 'people spend less' default to assuming 'people spend more', with the option to challenge, audit and revise.

 

I had a client the other day on a high income who told me his spending was $204,000 per year. Couldn't help him with finance.

 

It's too slow and not practical. Issue with expense is balance between efficiency vs quality vs unintended consequences. Benchmarks achieve efficiency. Quality isn't necessarily better deep diving into statements too, given the nature of life's variable spending patterns.

Also, taking away political/regulatory environment - is there really a problem with how expenses are treated (some countries use alternative debt to income ratios for servicing, ignoring actual expense patterns altogether)? Our pattern of arrears rates suggests methodologies are fine. Overregulating causes serious disruption, slowness, harm and hampers growth and flow of credit to sectors that need it to grow. Higher benchmarks have been applied throughout servicing calculators to address individual line item quality issues, allowing for greater efficiency of decision making through the process. Spending patterns completely adjust to mortgage sizes. One family can easily adjust from a 20k expenditure per month, but one can't reasonably expect to do so from a 2k per month expenditure.

Having variable benchmarks is a good way to achieve efficiency and quality - and has been more common now in adjusted HEM calcs of lenders.

 

@Terry_w in your experience as MB, whats a realistic family expense with two kids (mid range private school) excluding Mortgage?

 

Prob $3k for non luxurious living

 

Plus private school fees

 

Open ended question for the brokers; how much would a family of 5 earning say 200k a year be able to borrow from the bank these days to buy an IP?
Say the family travels one or twice a year for holidays with a 500k mortgage and a a bit of equity in the home.

 

Agreed. Moreover, if a borrower has actual expenses higher than HEM, but they want accept the risk that they will have to scale back to a more 'modest' level of expenditure in the event of a significant rate hike (take the kids out of private school, eat fewer avocados, whatever) - what business does a bank have stopping them? As noted, historic arrears rates are very low, suggesting that Australian borrowers reliably cut costs to avoid defaulting on their mortgage debt.

 

I would suggest that private school fees are not a living expense.

Certainly there are parents that believe that private schools are non-negotiable. I enjoyed an excellent education, my parents made significant sacrifices to send me to the best school they could afford.

Then in the early 80s there was a fairly nasty drought and my parents were primary producers (commercial bee keepers). I can specifically remember a very hot summer day in 1982 that the whole family went out to one of the bee sites. We all watched as Dad looked into the hives. Mum asked the question, "Private or public school next year?"

Dad shook his head, there was no honey in the hives. My brother and I attended pubic school until it started raining again.

The question of living expenses in credit assessment is also a question of what are people willing to sacrifice. For my immigrant parents, private schools were non-negotiable, until it became a choice of that or a roof over our heads and food on the table.

 

Probably not extra borrowing cap there

 

'Huge sentiment shift': Sydney, Melbourne auction clearances pick up

If these figures continue for a few more weeks, price declines are over and the period of stabilisation has begun. As mentioned, it could just be February catch up demand. It looks like there’s a large dataset next weekend (double number of auctions), that’ll be a useful data point too.

Credit level data will start to flow through and tell the same story too. Anectodally credit demand for Sydneysiders is very different. We’re a small office, but Curtis and I’s hours have gone up 50% this month compared to 3-6 months ago. There seems to be a wave of demand that’s just woken up.

Given the strength of the economy and underlying fundamentals, there was always going to be a point where demand rises from associated price falls. If current trends continue, that level was ~10-15% (always likely) not 25-30% (crash).

 

I wouldn't believe everything you read on the strength of the economy. All is definitely not rosey, in VIC especially, you need to have your ear to the ground, not your eyes on the newspapers and what the politicians say.

I have been mentioning rate cuts for a very long time now. The RBA has now snuck this into their dialogue.

One of the largest players in steel (Melbourne) have just about wiped out all of their night shift staff. I can give you plenty of other examples as well

 

That’s true, data is suggesting a bit softening late last year. The general point was that there’s been relatively significant price falls over the past 18 months with a backdrop of pretty strong economic data (employment boom, good growth figures, unemployment falling). That’s a litte unusual compared to recent price drop history. Now it looks like the softening in prices is part of the story behind a general softening in recent economic data.

 

The way I see it is even with strength of economy and underlying fundamentals with so much infra project already in motion, Sydney has fallen so much and so fast.
Falling new approvals, OTC settlement issues, homeowners 'no longer feeling rich', job creation from infra project slowing will soon/if not already start impacting the job front.

Even with the current fall in sydney,
With P2I still historically very high, rents easing, supply remains elevated for at-least next 2/3 yrs,
is it attractive for investors? as the new game going forward will be rental yield play in light of potential NG and CGT changes, subdued credit growth and slowing migration.

 

It would have to keep increasing from this level. The clearance rate is still weak and that's on reduced volume.
Sales volume is also low $168,775,257 partly due to the lower number of total auctions.
Can't give as much weight to these results until auction numbers normalise (pick back up).

 

Don’t forget it’s also off insanely high “unreported” (failed imo) auction results, and typical seasonal uptick.

CoreLogics dwelling price index is showing declines accelerating. Not slowing or flat.

 

Spot on. I think this week has a large number of auctions that'll give a more accurate reflection of what's going on.

@berten - re reporting that's true. Although thats the case in December and Feb. There's always lots of unreported results all the time, I'm not sure if there's anything to suggest this behaviour has changed in the last couple months. The information is in the trend (preliminary moving from low 40's to early 60s). It's too early to read anything anyway, will need a few more weeks of this. As mentioned, pricing data isn't showing February data, its showing settled sales in Feb where the actual sale was made late last year. The data is a few months behind what is on the ground.

 

The rate of unreported is significantly higher. Sydney prelim had almost 40% unreported. If you don't report the failed auctions, and withdraw those that are going to fail, voila, clearance rate is higher.

But look closer at the actual cleared volumes vs auctions that WERE listed, far less than half sold. Additionally, if you look at volume of sold houses it's tiny compared to last year, and the median sale price in both this week and last weeks clearance results is also well down.