Will a Crackdown on High-Debt Home Loans Pop the Property Boom?

Will a Crackdown on High-Debt Home Loans Pop the Property Boom?

Property prices are booming everywhere.

Recent news is out that the average size of a new mortgage to buy an established house in WA has soared by almost $50,000 in two years.

CoreLogic has estimated that Perth’s median house price has climbed by almost $260 each day over the past 11 months.

Perth’s median house price to the end of July is $568,000.

That looks pretty cheap to anyone living in Sydney or Melbourne, where the median is well over $1 million.

It’s one reason there are more than a few interstate property investors eyeing up WA.

Especially considering what’s occurring in Melbourne and Sydney’s real estate markets at the moment.

Agents in Melbourne are telling me that the last thing they need these days is a buyer.

Only one-on-one inspections are permitted.

It can take up to 3–4 hours to get the same volume of people through a property as you would in a standard 30-minute open for inspection!

That’s why many are selling before they have a chance to go to auction.

I’m seeing multiple offers going on the table within 48 hours of a property hitting the market.

Properties are selling hundreds of thousands above the asking price.

There are often no fundamentals behind the dollars being paid.

Often not a comparable sale to support the price.

Being in this market for many buyers these days is a bit like playing pin the tail on a donkey.

Throwing the maximum down in the hope they’ll beat the competition.

This is one reason Treasurer Josh Frydenburg has finally given his backing to regulators to crackdown on high-debt home loans:

We must be mindful of the balance between credit and income growth to prevent the build-up of future risks in the financial system.

Carefully targeted and timely adjustments are sometimes necessary.

There are a range of tools available to APRA to deliver this outcome.

It means we could potentially see a return of a higher interest rate serviceability test.

Currently, the serviceability test is 2.5% above the bank’s lending rate.

If that increases, could it slow the market?

Maybe in Melbourne and Sydney, where the median is well over a million dollars.

However, the boom will continue in the cheaper capitals where rents are still on the rise and vacancy rates are at rock bottom (like Perth and areas of South East Queensland).

There’s already an exodus of people leaving Melbourne (‘the least liveable city in Australia’) — interstate markets will continue to benefit.

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Also remember, there’s a fair bit of cash sloshing around at the moment.

Not just from the government stimulus, but the CBA are estimating money saved from limited overseas travel and entertainment due to lockdowns could potentially total an estimated $230 billion!

(That’s around $11.2K for every person over the age of 16.)

All that aside, my good mate Louis Christopher (from SQM Research) observed the other day:

Back in December 2014 APRA brought in their first round of macroprudential tools.

And one of those measures was a serviceability test which included a theoretical test for borrowers assuming rates went to 7%.

But did those measures cool the market in 2015?

The answer was the market still rose by about 8% which was slightly higher growth rate to 2014.

Although, notably, as Louis points out:

…the new serviceability test was somewhat compromised as there were two cuts of 25bp each in 2015, one in Feb and the other in May of that year.’

It wouldn’t surprise me to see interest rates drop into negative territory from where they are now.

The RBA have already made it clear they’re not going to use interest rates to slow the property market.

And with so much speculation pouring into land, the productive sectors of the economy with continue to suffer.

Bottom line — we have a way to go yet before this boom has run its course.

If you’re an investor, carefully pick which areas you target.

At the least, the smaller states by population are likely to continue growing strongly for the foreseeable future.

Best wishes,

Catherine Cashmore Signature

Catherine Cashmore,
Editor, The Daily Reckoning Australia

PS: Australian real estate expert, Catherine Cashmore, reveals why she thinks we could see the biggest property boom of our lifetimes — over the next five years. Click here to learn more.