Hot on the heels of the Coalition’s win at the recent Federal Election, APRA has now indicated it will look to potentially lower serviceability requirements for new home loans.
The Coalition victory has removed uncertainty around negative gearing and capital gains tax changes, which is expected to bolster the wider market, and according to Goldman Sachs, deliver a “moderate positive shock to sentiment in the corporate sector, and a more meaningful one in the housing sector.”
A further boost to market sentiment was delivered by APRA this week, proposing to remove its guidance that lenders should assess whether their borrowers can afford their mortgage repayments using a minimum interest rate of 7%.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7% floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so,” APRA chair Wayne Byres said.
APRA is now proposing to change the 7% serviceability assessment, to instead apply a 2.5% buffer on top of the loan’s actual interest rate. For example, if a loan’s actual interest rate is 4%, the bank will assess the customer based off a 6.5% interest rate.
Most banks assess borrowers at 7.25% so this change, if approved, would have a significant impact on many Australians looking to secure finance for a home or investment property.
On top of this, borrowers will also potentially benefit from expected rate cuts as early as next month. The RBA is poised to explore cutting rates in next month’s meeting, with RBA Governor, Dr. Lowe commenting that “a lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target.” Earlier this year, one of Australia’s biggest banks, Westpac, forecast the RBA to cut rates twice later in the year, effectively trimming the official cash rate to only 1%.
First home buyer increase
First home buyers are not only set to benefit from the potential easing of serviceability restrictions, they will also receive a helping hand from the Coalition’s proposed ‘First Home Loan Deposit Scheme.’
The Scheme will offer loan guarantees for first home buyers to allow them to buy a property with a minimum deposit of only 5% instead of 20%. It will also save them around $10,000 by not having to pay Lenders Mortgage Insurance (LMI).
First home buyers have already returned with force to the market and this number is likely to increase further once the ‘First Home Loan Deposit’ scheme is implemented.
In the 2018 financial year, 115,000 new home buyers had loans approved; the highest number since 2009-10. More than 110,000 Australians bought their first home in 2018 – the highest level in nine years.
The First Home Loan Deposit Scheme, if confirmed, will start on 1 January next year and will be targeted towards first home buyers earning up to $125,000 annually or $200,000 for couples. The value of homes that can be purchased under the Scheme will be determined on a regional basis, reflecting the different property markets across Australia.
The National Housing Finance and Investment Corporation will partner with private lenders to deliver the First Home Loan Deposit Scheme, prioritising smaller lenders to boost competition.
With the Coalition looking having now secured a majority government, pre-election legislation promises are more likely to be passed, including smoother implementation of what has been promised in the recent Federal Budget.
Tax relief was the headline of the recent Federal Budget, with tax cuts promised to low- and middle-income households, designed to boost savings, consumption and consumer confidence with broader positive implications for the economy.
Assuming the proposed cuts pass through Parliament, from 1 July 2020, more than 10 million workers will receive a tax offset; with around 4.5 million receiving the full $1,080 offset for 2018-19.
By the time the tax relief plan is fully implemented, 94% of taxpayers will pay no more than 30 cents in the dollar.
The top 5% of taxpayers will continue to pay around one-third of all personal income tax.
Infrastructure pipeline: a $100 billion 10-year plan
Also expected to positively impact the market is the continuing $100 billion infrastructure pipeline which includes:
- Brisbane Metro, Gold Coast Light Rail in Queensland.
- Western Sydney Rail in NSW.
- Melbourne Airport Rail Link, Monash Rail upgrade in Victoria.
- Gawler Electrification Project in SA.
- METRONET in Perth.
- Removing traffic pinch points through a $4 billion Urban Congestion Fund.
This massive infrastructure commitment combined with greater collaboration between federal, state and local governments via City Deals will drive further growth in jobs, economy and population; especially to major capital cities.
City Deals ensure all levels of government work together, with investment coordinated to benefit taxpayers.
City Deals are already up and running in Western Sydney and Adelaide. The Government is also actively engaging with the West Australian Government on a Perth City Deal, and with the Queensland Government on a South-East Queensland City Deal.
Despite global uncertainty, the Australia’s economy has been resilient under the current government.
More than 1.3 million new jobs have been created since 2013. More than 100,000 new jobs were created for young Australians (aged 15-24) in 2017-18.
This is the highest number of jobs in a financial year on record. Australia now has the lowest level of welfare dependency in 30 years.
Further, after more than a decade of Budget deficits, the Coalition Government delivered a welcomed $7.1 billion surplus in this year’s 2019/20 Budget.
With certainty around housing/tax policy, ongoing and strategic spending in developing capital city infrastructure, boosts to first home buyers and tax cuts for middle-income earners – all set against a wider backdrop of easing lending restrictions and low interest rates, we expect positive signs for the property markets nationally. We will continue to monitor these changes closely and provide updates for investors as they are released.