Is the regulator’s work done yet?

I’ve written a lot about the Australian Prudential Regulation Authority (APRA) this year because they’ve been pulling levers for nearly two years now.

But as we head into the New Year, the question becomes “Is their work done yet?”

Friend or foe?

The thing with the regulators is that they can be both friend and foe.

They’re looking for a long-term sustainable marketplace, but as I’ve said numerous times throughout this year, what are they being held to account for?

First Home Buyer AdAlthough, I must admit that many of the measures they have introduced have been quite sound for the long-term sustainability of our housing markets. Limiting investor LVR’s especially in conjunction with interest only lending just seems to make sense, as does ensuring people aren’t overcommitting themselves when their interest only terms expire.

Where do they go from here, though? Because they haven’t finished if you ask me.

The APRA Chairman recently came out and said that all these measures were meant to be quite temporary.

However, then even more recently, they’re talking about the concerns over high household debt, which ties into my previous living expenses conversation.

They seem to be saying that there needs to be some balance around what people actually live on. And I agree but this also has to be measured between what they actually need to live on and then the choices and the discretionary spending that people have. The argument that people earning more have to spend more just doesn’t wash with me – they do it because they can and if they couldn’t, then conversely they wouldn’t.

I believe that the high loan to income ratio is probably something to look at, as we’re seeing household debts rise but people not really knowing what their living expenses are.

The problem is that we’ve had increasing loan to income lending over the years, but we’ve also had low wages growth. At some point there has to be a breaking point with people’s debt levels and their living expenses.

Income ratio worries

Income Ratio

We’re seeing a really strong housing market, buoyed largely by investors, in a low wages growth market.

We’ve got sound unemployment rates, although we’ve still got a very high part-time workforce who probably would prefer to be employed full-time. Unemployment is not the issue, No, the issue is underemployment. What I mean by this is there are still a lot of people who would prefer to be in full-time employment but have had to accept reduced hours to retain their jobs.

But then, by lending standards, a loan to income ratio is used to assess people’s creditworthiness or serviceability. Now, as a broad-based rule, what we say to people is that your borrowing capacity is about five to six times your annual income (all incomes sources).

So, if you’re earning $50,000 and you want to buy a home, your rough capacity is between $250,000 and $300,000.

Now, you can get to six, and six and a bit, times your income if you use different lenders’ policies, you’ve got negative gearing and the like, and this is where professional finance strategists like the team at Intuitive Finance, really come into our own to correctly analyse these requirements and get the best outcome for clients based on their total income.

But my suspicion is that these ratios will be looked at next by APRA and will potentially move to reduce them.

When I started lending, quite some time ago, it was talked more about four to five times – and just as the markets have grown, the banks’ balance sheets have expanded, and property prices have grown, it’s probably got out to that five to six times ratio.

But we need to be balanced in terms of how much of a person’s net salary is being committed to loan repayments.

By getting to 50% to 60% of their net income today in some locations like Sydney, with its strong capital growth over recent years, has the potential to cause people grief should even the smallest of life events impact on them.

That doesn’t leave a lot for people to survive on, and they don’t really know what it costs them to live, so there are some concerns about those ratios.

What’s ahead?

Property Market what is aheadWe’ve seen in the past two to three months, the Sydney market has really moderated.

I know that APRA is very pleased with that – and that’s largely driven by the reduction of investors.

What’s interesting is that Sydneysiders haven’t seemed to heed some of the warnings.

They’re still going in and committing to these property purchases.

We’ve spoken to a few people recently that have put themselves in a position where they’ve committed to purchases – and there’s no subject to finance in New South Wales – so they’ve committed to a purchase, and then it looks like they’re going to be unable to fulfil them just because they haven’t done their due diligence.

We’re starting to see auction clearance rates in Melbourne moderate as well so it would appear the work is done there or at least having some impact. Melbourne was a little later to the party than Sydney and so has performed a little better in the last 12-18 months.

However, Melbourne is still creating plenty of jobs, so where there’s employment and infrastructure spending on roads and rail networks that’s significant.

Southeast Queensland and Brisbane are starting to prosper

Client And Agent exchange contracts in NSWWhile Brisbane and the southeast Queensland market has probably not enjoyed the same boom as the southern states, with its high yields and lower entry levels, we could see Brisbane and the southeast Queensland corridor have a better year in 2018.

Then you’ve got Canberra, which has been strong, as has Hobart, but that’s a very small market – don’t forget that. They aren’t getting my investment dollars anytime soon.

And finally, you’ve got Perth and Darwin, depending who you talk to, they may or may not have bottomed out. They’ve certainly had a tough couple of years based on their local economies and the mining construction booms coming to an end.

Lending in the New Year

Given the intervention in the market this year, I believe in the first half of 2017 our markets held up well.

But in the second half of this year that hasn’t been the case as much, because there is always a lag with this type of market interference.

You actually need a three to six month rolling average to get a proper grasp on whether the markets are moderating.

Now, in November and December, we’re starting to see low 60% clearance rates in Sydney and Melbourne’s is back to the low 70s.

It’s starting to point to a more moderating market and we’re starting to see, potentially in New South Wales, it entering a buyer’s market, not a seller’s one.

Melbourne is still, like I said, relatively buoyant, but Melbourne was a bit later to the party than Sydney.

Then you’ve got Brisbane and there’s a massive amount of infrastructure being programmed, which is creating lots of jobs, and people will go where they’ve got work.

Of course, everyone has to live somewhere, so it probably bodes well for their housing markets in 2018.

First Home Buyer AdI believe there will be a continuation of moderating market conditions in the New Year and, from a lending perspective, the living costs and income ratios that lenders use will be a focus of the regulators in the first half of 2018.

Conditions are tougher for a lot of us that have been lending for a long time, but I have to reiterate – this is a normal part of every market cycle and credit contractions have been a key component in most property cycles, if not all.

It’s as tight and tough for those with increasing debt or looking to increase their borrowings as what we’ve seen.

People are still able to get money, but it’s really centred on their personal exertion income and their borrowing capacity is centred on or around their base salaries or their profits if they’re running a business – not bonuses and commissions or all of those things that are a little subjective.

So, as we head into next year, it’s just about getting the balance right and making sure you’re presenting as well as possible to lenders – every single time.

Have a wonderful holiday period, safe travels and let’s hope 2018 is a great year for everyone in their investing journeys.

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The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.

Andrew Mirams

Andrew Mirams

Andrew Mirams is the Managing Director of Intuitive Finance and is a highly qualified mortgage advisor who holds dual diplomas in Financial Planning (Financial Services) and Banking and Finance (Mortgage Broking). Andrew’s expertise covers all aspects of lending for a diverse range of applications – from first home buyer loans or property upgrader loans, property investor loans, expatriates and loans for self-employed. With almost 30 years of experience, Andrew has been acknowledged by the mortgage industry as one of its best performers with multiple awards including regularly featuring in both the top 100 mortgage brokers list and Top 50 Elite business writers. Andrew was voted Victoria's favourite Mortgage Broker at the 2015 Investors Choice Awards, and won again for the same category at the 2017 Better Business Awards. The team at Intuitive Finance has also figured prominently by winning the 2016 "Best Independent Office (<5 brokers)" and "Best customer Service" Awards, and more recently at the 2017 MFAA National Awards, they also took out the "Best Customer Service" Award, a recognition which speaks for itself! Visit Intuitive Finance for more information.
Andrew Mirams

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