My posts from over 2 years ago about interest rates and APRA

But this only applies to investors...
I am still waiting for someone to show me a comparison between a vanilla owner occupied (majority of the property market) from “the glory days” versus one with new lending criteria but on say a 6% assessment rate.

I still maintain that whilst investors definitely play a big part in property prices, it’s the emotional owner occupied buyers and mum and dad developers who throw their arms up like their on fire at an auction that cause the crazy prices.

I want to know how THESE people will be effected by the reduction in rates and assessment??

 

More a rising market phenomenon isnt it?

 

= Emotional FOMO

 

The floating 2.5% assessment rate will add @ 10% t those who have no other debt. A detailed analysis has already been done by multiple brokers and published in national papers last weekend

This figure will improve if coupled with several RBA cuts, and IF those cuts are passed through.

But while there's an obvious gain from a reduction from 7.25% to 6.5%, and then to 6% if that were to happen , there are other components within a calculator and within lender policies that people shouldn't forget. HEMs hasnt gone anywhere. banks trawling through your accounts to forensically examine living costs hasnt gone anywhere . Shading of some income sources hasnt gone anywhere. Credit Card minimums going from 3% to 3.8% havent gone anywhere.

No one is arguing there wont be an improvement for some borrowers.

 

Thanks Euro! As always, very insightful.
Are you able to share what percentage of capacity was lost for these vanilla borrowers?
I am just trying to gauage how this 10% increase compares to the glory days?

 

Working on it @albanga, there's many interactions involved with a floating assessment rate it takes a bit of time to work out how to best understand differences to borrowing capacity and in particular, comparing it to actual previous credit environments

Early insights are, for some income banks (and minimum expense) owner occupier borrowers on certain loan sizes, they'll experience the best borrowing power figures in Australia ever. That is, an assessment rate at 6% outweighs the increase in HEM for loan sizes/couple groups/etc in some cases. We also have a 12% increase in borrowing power for owner occupiers at this assessment rate (or closer to 15% if the assessment rate drops even further).

In saying that, as the RBA have noted and posted a lot about, most OO loans don't go near their borrowing power limitations. I.e. it will help all OO borrowers, but a lot of those won't take it on.

 

if so... what is all the 'back to peak' excitement about then?

 

If you believe that booms are driven by easy credit then you would be excited that OOs are experiencing peak borrowing power. Peak borrowing power should equate to a peak boom shouldn't it?

 

No.

The "I told you so" argument is based on the fact that some of the great people on this forum who had supposedly successfully traded some properties during the boom, suddenly self-promoted themselves to national fiscal policy experts over night and opened their mouth and commentated on interest rates.

I do remember, and the posts may still be lurking around from back then, that quite a few (I dont like to embarrass people you know who you are) were predicting several rate rises during 2017 and then 2018 and supposedly the official RBA cash rate was to be at or above that 6% mark.

That was all wrong for reasons I argued then and still argue today.

Same story happened around the advocacy of the adopted policies by APRA. Again I argued the very existence of a separate (to RBA) authority to control monetary and credit policy was wrong as it would be out of sync with RBA.

You must understand that the reason why the economy is stuck and we may be heading for a recession is very simple.

You cannot have the households biggest and most important investment to fall in value and expect them to still be confident and spend money. It wont happen.

The rate of property value rises between 2010 and 2017 should have never been that rapid. The reason why it was that rapid was RBA made money cheaper but APRA (being the seperate body) failed to introduce some form of credit policy in-time & simultaneously to try and to a degree control the flow of money into different channels. So it was a mistake.

The second mistake was the knee-jerk reaction by APRA to then fully tighten credit policy in panic followed by RBA getting arrogant and failing to reduce rate and the icing on the cake was state governments punishing foreign buyers and that resulted in very rapid values falling.

No.

Its not a matter of getting excited now, its a choice between recession or no recession for reasons I mentioned above.

APRA have now said that they will be putting the stress test at 2.5% above the actual interest rate (rather than 7+% flat no matter where interest rates are).

JP Morgan is predicting 4 rate cuts in Australia this year and they also predict some rate cuts by US fed reserve as well.

Although I agree with them, I dont think it will happen in that way.

In any case in my humble opinion, official cashflow should sit at or very close to 0% with stress tests being done not far from it and that will then take a year or two to get market sentiment to where it must be in order to increase domestic consumption.

 

Being able to come up with original and funny jokes are the kind of qualities I look for when picking an expert in Buying AND managing properties across many cities.

Do you offer more discounts to members who laugh?

 

JP Morgan has just predicted a few rate cuts this year both in Australia and the US.

We will have to see but my thoughts are we will need to bring property at least back to where it was in 2017 and let it plateau if we are going to change things with regards to domestic spending.

 

This is gold lol

 

but if the argument is that segment never utilised its peak capacity before why it should do now?

 

@Redom g your a good egg!
I very much look forward to the findings.

 

Because we humans are a funny species.

Let’s say you see a broker now and they say your maximum borrowing capacity is $800,000.

Now let’s assume you saw this same broker after a change to assessment rate and said broker said your maximum borrowing capacity is $900,000.

Do you think a borrower would be more comfortable lending $800,000 under scenario 1 or scenario 2.
It’s actually a rhetorical question.
Absolutely zero difference in amount and repayments but I can guarantee the borrower will feel much more comfortable to lend the 800k in scenario 2

 

I think people who don't borrow to max are conservative borrowers whose criteria for borrowing is more to do with their comfort of repayment affordability with buffer in mind, but not many belong to this category. I agree with the basic premise that many are emotional buyers and higher BC just provide them more ammo to satisfy their emotional side.
Just that in earlier discussions around late 2017 the argument of 'many not borrowing to the limit' was thrown as the argument in support of 'why the tightening credit will not lead to price falls' then.

 

Good points.
This issue I see though is I am not sure how many people know what their comfortable repayments are and use the banks servicing as Gospel.

“The banks says I can borrow that much and they know best”...nek minute their on A Current Affair blaming the banks for lending them the money. Forget any form of budget where your actual monthly committed expenses are documented.

Point being don’t underestimate just how much people use banks assessment as a benchmark for their own capacity. I think a lot of people feel comfortable using the banks capacity and purchasing under that. They feel as though that is their buffer, instead of actually a budgeted buffer.

My friends do this very thing. “Yeah bank said I could borrow 1mil but no way am I going to lend that much. I’m just going to lend 800k”.
I know if their capacity was 800k they would lend 700k with the same response.

 

You are earning more money than yesterday - yes. But you aren't earning more than a year ago.

A screw that's wound all the way in , then wound two rotations back......still leaves you screwed

 

Good assessment.

I will take a screw that's being unwound especially because it's likely it will continue to be unwound further.

 

.

i've heard the forensic analysis will be dispensed with fairly soon (source: a good source).