In the minutes of its May monthly board meeting, the RBA noted that “subdued” economic growth in the second half of 2018 had persisted into the March quarter of 2019, and that new home constructions remains “weak”.
The board noted the economy has also seen “weaker than expected” retail sales and consumption, with immediate risks for these “tilted to the downside, given the extended period of low-income growth and the adjustment occurring in housing markets”.
Indeed, in a speech in Brisbane today (21 May), governor Philip Lowe said that, “over the second half of 2018, household consumption increased by just three-quarters of a per cent, which is an unusually soft outcome”.
According to property data firm CoreLogic, house prices are slowing their rate of descent on the hefty falls witnessed in most areas of Australia throughout last year — but are still falling from their peak in September 2017.
The nation’s housing values fell by 0.5 of a percentage point in April, taking them down 7.2 per cent over the past year and 7.9 per cent below their peak.
Sydney and Melbourne have been hardest hit, plunging over the last 12 months by 10.9 per cent and 10 per cent, respectively. But almost all markets, including regional areas, are now cheaper than they were a year ago: save for modest increases in Adelaide, Canberra and Hobart (up by 0.3 of a percentage point, 2.5 per cent and 3.8 per cent, respectively).
The RBA also noted that, despite employment remaining relatively strong, inflation results for March were “noticeably lower than expected”, and that such weakness “was likely to be more persistent”.
Meanwhile, the Australian Prudential Regulation Authority (APRA) — the same body that moved to restrict the flow of loans to property investors, and interest-only loans more broadly, in a bid to reign in runaway house prices in Sydney and Melbourne — has now moved to ease those restrictions and get funds flowing once more.
APRA on Tuesday (21 May) announced that it had written to authorised deposit-taking institutions (ADIs) — i.e. most of our banks and lenders — proposing to amend these.
“APRA has proposed removing its guidance that ADIs should assess whether borrowers can afford their repayment obligations using a minimum interest rate of at least 7 per cent. Instead, ADIs would be permitted to review and set their own minimum interest rate floor for use in serviceability assessments,” it said.
“APRA has also proposed that ADIs’ serviceability assessments incorporate an interest rate buffer of 2.5 per cent. Currently, APRA expects ADIs to assess loan serviceability using the higher of either (i) an interest rate floor of at least 7 per cent, or (ii) a 2 per cent buffer over the loan’s interest rate. APRA’s guidance also indicates that a prudent ADI should use rates comfortably above these minima; most ADIs use 7.25 per cent and 2.25 per cent, respectively.”
What has changed?
For APRA, the dive in house prices and a weaker economy mean that interest rates are likely to remain at — or even below — their current historic lows for longer than it had originally anticipated.
“APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk,” its chair, Wayne Byres, said.
“Although many of those risk factors remain — high house prices, low interest rates, high household debt and subdued income growth — two more recent developments have led us to review the appropriateness of the interest rate floor.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases — possibly unnecessarily so.”
Mr Byres also suggested that the measure had achieved its aim of differentiating the borrowing costs for investors and owner-occupiers, reflecting the different levels of risk between the two types of borrowers (i.e. that people are more likely to pay down their own mortgage first before that on an investment property).
“In addition, the introduction of differential pricing in recent years — with a substantial gap emerging between interest rates for owner-occupiers with principal and interest loans on the one hand, and investors with interest-only loans on the other — has meant that the merits of a single floor rate across all products have been substantially reduced,” he said.
Another big change has been that we now know the result of the federal election.
The RBA admitted that its forecasts were uncertain, in part because the outcome of the election would impact whether tax changes outlined in the federal budget were implemented.
“The forecast for an improvement in growth in consumption depended on an increase in growth in household disposable income over the forecast period,” the minutes state.
“The forecast increase in household disposable income growth was supported by employment growth, a pick-up in wages growth and lower growth in tax payments, partly because of the introduction of the low and middle-income tax offsets announced in the Australian government 2019–20 budget.”
But as has now been widely reported, the promised tax cuts for low and middle-income earners may not be forthcoming in July this year, due to difficulties in getting Parliament to approve them before the end of the financial year.
That will likely see them pushed back until the same time next year.
So, what does this really mean?
Changes to lending requirements are not guaranteed and, even if they are forthcoming, are likely to take some time to be enacted.
APRA will be conducting a four-week consultation period with lenders through to 18 June, and will then consider the responses it receives before making a final decision.
That means that we are unlikely to see any movement on this within the current financial year, making the spring selling season the first time we could really witness whether it tempts property buyers into the market.
A more immediate response would, obviously, be a cut in interest rates.
The RBA copped flack from many commentators last month following its decision to keep rates on hold.
Among them was Peter White, of the Finance Brokers Association of Australia (FBAA), who said that “housing does play a major role in the health of the economy, and while I understand inflationary pressure is subdued in part because of lower housing costs, we need a healthy and resilient housing market and we need accessible and affordable credit to achieve that”.
Most economists and pundits are expecting at least two rate cuts in 2019.
With the election result known, and immediate tax cuts now looking to be off the table, the RBA board will be under even more pressure to cut interest rates in June, in order to deliver the property market and the wider economy some financial support.
The RBA board will next meet to determine interest rate settings in a fortnight on 4 June.