A modest headwind for a hot housing market – for now

After months of ‘will they or won’t they’ chatter, the Australian Prudential Regulation Authority has stepped in to counter rising risks in the housing market. 

So, what does it mean for prices? 

Well, in short, not much – in the short-term at least.  

APRA’s move last week to increase the interest rate buffer banks use when assessing customers’ serviceability of loans from 250 basis points, or an additional 2.5 percentage points on top of the rate being offered, to 300 basis points is only expected to reduce the average borrower’s maximum borrowing capacity by around 5 per cent.

In addition, it will only impact the minority of people who borrow the absolutely maximum they can, with investors the cohort of buyers most impacted given they are most likely to have loans being assessed on the buffer rate and tend to carry more debt overall (serviceability tests are applied to total debt not just the loan being considered). 

So, while it’s definitely going to take some of the heat out of the market and confidence may wane a touch, it’s unlikely to result in a material slowdown given the strength at the moment. 

National price growth is running at close to 20 per cent per annum and the latest auction market results remain strong, despite a drop off in volumes, indicating further gains ahead. 

Indeed, with vaccine rollouts hitting key levels and a gradual easing in restrictions in coming months, Australia’s housing market looks set to sail through the delta lockdown shock largely unscathed.

That said, this is likely just the beginning of “macro prudential” intervention to cool the market with more measures likely early next year, perhaps in the form of limits on high debt to income and high loan to vaue lending. 

Add in stretched affordability and the prospect of actual interest rate increases in 2023, it’s looking like price gains will moderate back towards single digit price growth by the end of next year and perhaps even some modest price falls the year after. 

But for the time being, the hottest housing market in many years still has a bit further to run.


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