What APRA's moves to reduce the heat from the property market means for you

Oct 08, 2021

This week: What APRA's moves to reduce the heat from the property market means for you

In the video above I look at the move by APRA to reduce the heat from the property market by reducing the amount you can borrow. I share why they've done it, whether I think it's a good thing and talk about what that means for you.

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Hey, and welcome to Mel's Money Musings. This is the very first edition. And what you can expect is every Friday in your inbox to hear from me as I add my expert voice to the financial noise that's happening around you. It might be an article or comment, dissenting news reports or something that I've seen that's problematic that week that I wanna add my voice to. And I hope that it's that trusted expert voice that you can listen to and start to make sense yourself of what's happening in the financial world.

So this week I wanna talk about ARPA, the rising house price market, certainly in Australia, and what they've done this week in order to dampen those prices.

So to set the scene in Australia in the last 12 months, house prices have risen by more than 20% which is a lot. And most of the reason for that is because of historically low-interest rates, meaning that you and I can borrow more than ever before.

And so the demand from both first home buyers and investors have driven those house prices up because we can borrow more. So therefore the house prices have risen because of the demand and the ability for us to buy more and more expensive houses.

Now what's also fueled this is from confidence because the Reserve Bank came out and said last year that they didn't intend to increase interest rates till 2024. So there's a level of confidence from borrowers that they're gonna see these interest rates low for at least in the short term.

Now, what also happened a few months ago is that in June, July 22% of all mortgages written were at six times borrower's income which is a lot. And APRA has looked across and said, well, the Reserve Bank aren't gonna do anything about it. That's a red flag, that's a red flag, that's a red flag, we're going to step in.

And on Wednesday what they announced is they were going to add a 3% buffer, a serviceability buffer, if you applied for a loan. Now there was already a two and a half percent buffer there, but they've upped that to 3%.

So what that means is that if you're applying for a loan, the bank don't assess you at the two and a half percent interest rate that they'll charge you. They'll assess you at two and a half plus 3%, which is five and a half percent.

And personally, I think this is a good thing because these are unusual times, these are historically low interest rates for a reason to stimulate the economy. The Reserve Bank never intended house prices to shoot off like this. So adding that buffer, I think, is a positive thing because when interest rates rise and notice, I said, when not, if it means that borrowers will continue to be able to afford that and there won't be a crash where there was a rush of borrowers who simply can't afford these large loans that they've been assessed on, on artificially low interest rates.

But what will it mean for you if you have a mortgage or if you are looking to buy or if you're looking going, oh, okay. Does this mean it's going to be harder to get a loan? Do we think this will reduce the heat from the property market?

Well, let me say that I don't think we are going to see that happen in the next couple of months. And that's because the spring market is that time when borrowers come out anyway to buy, but also there are a whole bunch of people that have been pre-approved for a loan that are not gonna be affected by Wednesday's announcement.

And what I'm concerned about is those people are gonna have FOMO and go, oh my gosh, if we don't buy now with this pre-approval, we're not gonna be assessed by much in a couple of months time or in five or six months time for as long as that pre-approval lasts if we wanna apply again.

So I think there'll still be a little bit of heat in the few months to come until those pre-approvals kind of run out. But please also know that if after those few months time, if the house market continues to increase, APRA have said they will continue to act.

And they've said that they will do things like they'll go back to responsible lendings for banks. So that was removed when COVID happened. But responsible lending came in after the banking commission and meant things like banks needed to look at your actual spending in the last six months and base your ability to borrow on your actual spending.

Um, so they might start to tighten up how much you can borrow by bringing in other serviceability metrics. So please know if this doesn't work, they're going to continue to act. Plus just because the Reserve Bank said they won't step in doesn't mean they actually won't if these measures don't work.

And if we look across the ditch to New Zealand, this month the Reserve Bank of New Zealand increased their interest rates for the first time in seven years, despite them having a very similar situation to what's happening in Australia.

So don't think that just because they said 2024 doesn't mean that it may not happen earlier. So what does this mean for you?

If you were looking to refinance, if you were looking to buy something in the next 12 months, or if you had pre-approval, what does that mean? Well, as always, what I would've said to you prior to Wednesday would actually be the same as what I'm going to say to you now.

And that is first of all, don't act based on FOMO.

Don't act based on fear of missing out. Don't spend more than you intended to simply because you're emotionally worried that you're gonna miss out. So that's one. And I know that's so easy to say and not easy to do, but please make that your number one priority.

Two, don't buy more than you can afford.

 It doesn't matter if you have pre-approval. It doesn't matter if you are looking to buy, don't buy more than you can afford. So sit down and work out, okay, what am I doing? Not just today, but what am I wanting to do with my life in the next five years time? Am I gonna want career breaks? Am I gonna wanna go part time? Could I still service this loan if that was to happen?

And thirdly, just because you can doesn't mean you should.

Just because a bank says that you can borrow a certain amount doesn't mean that you should borrow that amount, because if you want to invest, if you want to, um, have career breaks, if you wanna do those other things, this actually may be wrong for you to borrow that amount.

And then certainly inside the My Financial Adulting Plan, um, I did an interview with Lawsie where she borrowed half of what the bank said she could because she looked at that and went, you know what, no, it's not right for us. And she chose to buy a smaller property than she potentially could have and further out than potentially she might have liked. And today she's freaking happy with that choice because she has choice.

But also if you are looking to refinance in the future, if you are looking to borrow in the future, be aware that these responsible lending rules could happen if these dampening techniques don't work.

So what I would be doing is I would be winding down credit card limits and closing credit cards. I would be getting rid of 'buy now pay later' platforms. And I would be spending as if I had a bank manager looking over my shoulder, assessing my ability to get a loan based on my current spending.

Because that way, if nothing changes and you're not assessed on your spending, no harm, no foul, but if you are, at least you are ready for it and you don't have to go, oh great. I wouldn't have acted this way if I knew that was coming.

Now, if you are looking to refinance and you are thinking that this move might be problematic for you, then what you could do is just go to your existing bank and say, Hey, I would like a drop in my interest rate, sharpen your pencils and get back to me and let me know what interest rate you could offer. And we are seeing great success inside the My Financial Adulting Plan with people doing that with as much as 0.5% taken off their loans simply from them asking. So if you were thinking that you might wanna refinance and get a better interest rate, you may not need to refinance to do that.

So that would remove the stress of refinancing, but also maybe not being able to be assessed for the loan that you're at now because of these new measures.

So lots to think about. Will these measures actually work? Only time will tell, but certainly ARPA have flagged that this is only the first in more to come if it doesn't work.

So their expectation is that we'll start to see, the average house price may still continue to climb, but what they're expecting as a result of the measures that they've done and that they'll continue to do is that it won't be at the rates that it has.

I hope that you've found this helpful. If something doesn't make sense, please let me know. If you've seen an article that doesn't make sense or you'd like my voice on something that you've seen DM me on Insta at more money for shoes or flick an email reply to hello [at] Melissa Brown [dot] com [dot] au. And if there's enough of the same, then I'll answer it.

Even if it's about Crocs, I feel like there's gonna be a Mel's Money Musings on crocs in our future as well. All right, everyone have a great week.


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