More possible RC lead changes-Tougher rules on borrowing capacity could be introduced.

Article on ABC News Online entitled "Homebuyers' borrowing capacity could be cut by up to 40 per cent under tougher rules"
Very interesting suggestions come out of RC to markedly increase the living costs of loan applicants to better reflect true costs.

(Sorry I couldn't find how to make a link direst to the article)

 

Sounds like that will be putting upward pressure on the rents! At least in Sydney. When someone earning 90k can barely afford something for 500k - how much more can it be cut?

 

This article, I believe:
Homebuyers' borrowing capacity could be cut by up to 40 per cent

 

Thanks @hobartchic. That's the one.

Could you direct me on how you did the link or where I can find instructions on doing it please?

 

When you do a comment, there's a little icon, it looks like a paper clip/ or like a chain link. Click on that, then add the address for the article. You can create a link there with words, that then go to an article directly as well. Hope that makes sense.

 

Icon is seventh from the left (counting bold icon as one)

 

On my iPad, I just copy the site address and then paste it directly into my comment.

 

Or that

 

Thank you @hobartchic, @Joynz for that. I was searching in Resources but couldn't find it.

 

Borrowing capacity has already been cut by an obscene amount, one of the reasons is due to the introduction of HEM living expenses.

Frankly, it is going to get worse. I can't see how the RC will help people borrow money.

 

Maybe they think we have a debt problem and don't want us to borrower as much money.

Not good for those not yet in the market, or for future price growth.

 

The basic HEM is ridiculously low, the lavish HEM is much closer to reality. The fact that APRA is now demanding greater due diligence by lenders is really just an arse covering exercise by APRA.

Wayne Byers would be well advised to pull the pin and find a new job in the private sector because by the time this Royal Commission is finished he will be unemployable.

 

Its UBS made up analysis. Good headline catcher, they're very good at that.

 

Perhaps you're right.

A few times a week I have to try to explain to investors that they can't qualify to borrow enough for more than one investment property and they ask how someone else was able to build a portfolio of six. The reason is the other guy did it a few years ago when the rules were different.

I use the same reason to explain to people why they can't borrow enough to get a basic entry level house in the outer suburbs, despite an ongoing savings record record that easily shows they can.


In isolation, all of the recommendations and restrictions have merit. A 7.25% benchmark isn't a bad thing. The HEM tables are probably conservative for most people.

The problem is none of this modelling considers what will occur if rates increase to 7.25% or how people respond to change. People tighten their belts if things get tough. If rates increase, so to salaries and rental income. Most lenders use today's rates to measure negative gearing ad-backs, but use 7.25% to measure affordability.


Lending capacity is only going to get worse in the immediate future as a result of the RC. In turn this will only widen the wealth gap between those who do and those who don't own property. Eventually when the economy is in tatters the government will recognise that they were far too conservative and overshot, but that will take a while and destroy a lot of lives in the meantime.

 

In the last 18 months (and probably longer) it seems all they do is use fear for their own self promotion. I tend to stop paying attention as soon as I see UBS being quoted on residential property/lending.

 

Living expenses is a spotlight issue for the moment.

Truth is there's plenty of buffer mechanisms already in place that account for a persons affordability. You can pick living expenses, assessment rates, income haircuts, etc etc to achieve the same result.

 

To be fair Peter, allowing people to borrow more than they can afford to payback has a tendency to destroy lives also, particularly if property prices drop. Providing them credit they can't really afford is far from responsible lending.

Australians have the second highest level of household debt in the world. The Royal Commission thus far, is demonstrating that lending standards have been lax and regulation non existent.

Your right, a credit crunch will be disastrous for many Australians but letting lending standards continue to be compromised would have been far worse.

 

I agree @Denis Flynn.

Actually default rates haven't increased significantly in recent years. I do agree that there was room for improvement. The level of interest only loans was quite absurd, especially in the owner occupier market.

That said, overall I think they've taken a fairly extreme approach to relatively modest risk. There's so many policies around lending at the moment that simply defy logic when taken in the overall context.

 

It’d be interesting to see actual research into default rates between loose and tight lending standards.
It used to be assumed if interest rates went up people would eat beans and rice for a while and make do. Now it’s assumed they can’t live without Foxtel , regardless of the impending default/homelessness.
I’d wager default rates are similar under both scenarios, just the second precludes lower income people entering the market.

Further I do think Hem is a big exaggeration of realistic basic expenses. Sure many people spend exactly what they earn, less expenses, it’s Einstein’s first law of economics. When people get a mortgage that housing expense increase, their other expenses compensate. The people who don’t compensate for their changes circumstances, the ones that can’t live without Foxtel, are going to default, regardless of the hoops they went through getting the mortgage.

 

Tight lending standards are not necessarily bad for low income earners. With tighter standards there is less competition (e.g. less capacity for debt so someone last week that could afford a million dollar mortgage, can not with changes) and a better chance they can enter the market.