Over the last few months I have encountered multiple young couples that have recently purchased property. These people are not property investors. They are young Australians all around 30yo who have decided it is time to get married and raise a family. Some of them are now realising they have been served up a shit sandwich of rising mortgage repayments and falling property values.
The latest house price rises have been bugging me. They seem more sinister than the standard MOAR followed by a minor correction. In the context of RBA making it clear that stimulus measures like TFF were temporary emergency measures that would be withdrawn, I ask myself the following questions:
1) How did a temporary 1-2% mortgage rate reduction end up manifesting itself as a 25%+ increase in property values?
2) Did the banks treat the rate cuts with a GFC Subprime-like permanency?
3) What regulatory tools are available to prevent temporary rate reductions being treated as though they are permanent?
Australian banks are obligated to factor in Serviceability Buffers. These are a contingency rate added to the variable rate in mortgage calculators to ensure that mortgage holders can cope with potentially higher rates in future. It is the perfect tool to use to give mortgage holders a temporary reprieve on repayments during a recession, whilst still forcing the banks to consider future rates in new mortgage applications.
These buffers are determined by APRA. Here is what RBA recently said about Serviceability Buffers:
“In 2019, APRA indicated it expected banks to use a serviceability buffer of (at least) 250 basis points. In early October 2021, to address rising systemic risks, APRA increased the buffer it expects banks to use to at least 300 basis points.”
Look at the mortgage rate chart below. APRA waited until October 2021 to raise the buffers by 0.5% to 3%. October 2021 FFS! Up until that date they permitted mortgage rates to fall and to be treated with some permanency in mortgage calculators. The banks were more than happy to lend out the limits being displayed by the mortgage calculators, especially with idiot Scomo offering up 15% deposit guarantees. The net result is recent borrowers have ended with a much larger mortgage than what should have been.