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Buyers get fresh leg-up from APRA

May 21, 2019 — 1.56pm

First home buyers have been given a leg-up into the property market after the prudential regulator signalled the end of lending requirement that had all borrowers assessed against their ability to repay a loan at 7.25 per cent.

The Australian Prudential Regulation Authority wrote to banks on Tuesday proposing a relaxation of serviceability measures that would effectively relax the requirements by up to 100 basis points, potentially ushering in a whole new cohort of buyers into the market.

Bank lending gets a boost as APRA moves to relax serviceability measures.

APRA chairman Wayne Byres said the proposed changes were not intended to weaken lending standards but recognised that the regulator’s floor of 7 per cent was not useful in the low-interest-rate environment. Mr Byres has suggested a buffer of 250 basis points be applied instead.

“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,” he said.

The changes mean that a home buyer who has secured a rate of 3.8 per cent will be assessed against their capacity to repay a loan at 6.3 per cent.

Handbrake removed

The 95-basis-point discount is a material decrease on the present floor of 7.25 per cent, which includes an additional 25-basis-point overlay used by every bank.

Investors are thought to be less likely to benefit from the changes because they typically pay a higher rate of interest, making the differential smaller.

The announcement of the changes follows comments from ANZ chief Shayne Elliott and reporting from The Australian Financial Review that the buffer had passed its use-by date.

Yarra Capital senior investment manager Edward Waller said the change would remove an artificial handbrake on lending and would boost the ability of the banks to lend.

APRA chairman Wayne Byres said the gap between the 7 per cent floor and the rate paid had become "quite wide".

“It becomes quite an enormous gap and had essentially become a restriction on lending ... it does play into a more positive outlook for credit growth,” Mr Waller said.

He said the news in conjunction with the surprise re-election of the Coalition government on the weekend had given bank share prices a shot in the arm after a long period of uncertainty.

“In the space of 48 hours we have had a couple of reasonably material positives for credit growth and by extension the housing market, and we really haven’t had any of that in the last few years.”

'Unnatural Acts'

Bank stocks extended the rally that began on Monday and by 1.20pm on Tuesday, ANZ was up 1.8 per cent, CBA was up 1.6 per cent, NAB was up 1.4 per cent and Westpac was up 2.5 per cent.

DB analyst Matthew Wilson asked why the prudential regulator was motivated to relax lending restrictions so soon after stating its measures were designed to be maintained through the cycle.

“Conditions must be far worse than what is apparent in the public data,” Mr Wilson said in a note to clients.

“APRA is now showing a willingness to fold and consider 'unnatural acts'. The market will likely embrace the signal with gusto, whilst the taxpayer will incur the moral hazard.”

UBS economist George Tharenou also expressed some surprise at APRA’s removal of the serviceability floor just four months after saying it was intended to be permanent.

Mr Tharenou said the change would boost borrowing capacity by about 8 per cent, but if the RBA cuts rates and mortgages fall to 3.5 per cent borrowing capacity would increase as much as 14 per cent.

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