Housing under scrutiny with sector set to fire up again as Covid recedes

There is still optimism in the housing market.​

The Covid-19 hiatus occurring across Sydney and Melbourne may have taken some heat out of the property market, but the risk is that pent-up demand fires the sector up again in 2022.

It’s a national obsession, and record low interest rates are probably here for another two years, at least.

Many lenders have been quick to point out that in some suburbs mortgage repayments are less than the monthly rent that is forked out, and as Covid-19 risks recede the appetite to take on debt will no doubt rise.

The central bank has long tracked household indebtedness – which has increased substantially over several decades – and it is often cited as a major risk to several countries, including Australia.

Demand for housing is cooling, though, in some states as federal government incentives roll off and inspections are made more difficult by pandemic restrictions. House prices rose at a cracking pace this year but the rate of growth is slowing.

Mortgage brokers in markets gripped by lockdowns say there has been a slight softening in new enquiries, but demand remains solid.

As the market pauses, regulators are maintaining a laser-like focus on conditions and lending standards in the housing market. That includes monitoring levels of household debt, the size of deposits going into property purchases and whether banks are maintaining lending standards.

The level of property investment and first-home buyer borrowing, which can tend to be at higher loan-to-value ratios, are also key factors.

Stimulatory monetary policy and governments pumping money into Covid-19-impacted economies have spurred house prices to surge across many markets globally, including the US and New Zealand. Across the Tasman, a string of measures have already been introduced to cool the sector, including macroprudential lending limits.

Here, some banks are still treading somewhat cautiously as Covid-19 lingers, but it’s clear any severe fallout in the property market is not a near-term risk.

Some are taking their own measures to pre-empt any potential changes by the banking regulator to mortgage serviceability metrics.

Commonwealth Bank in June changed its home loan assessment threshold with the floor rate rising to 5.25 per cent from 5.1 per cent. The floor rate, in this instance, measures whether a borrower can service their mortgage at an interest rate of 5.25 per cent.

That rate is looked at in addition to an Australian Prudential Regulation Authority buffer, which sits at 2.5 per cent.

In their assessment of whether someone can repay their home loan, banks use the higher of the interest rate charged on a mortgage plus the APRA buffer, or their floor rate.

CBA has the highest floor rate among the big four banks.

In 2019, as the housing market was wilting, APRA raised its buffer from 2 per cent to 2.5 per cent as it moved away from being prescriptive on the floor rate.

Given some fixed mortgage rates are below 2 per cent the regulator may be quietly ruing the decision and the fact it didn’t introduce a bigger buffer. Perhaps it’s hoping the banks follow CBA’s lead and ratchet up their floor rates should the market fire up again.

Banks and regulators also need to be mindful of what happens when more normal rates of immigration resume, and how that plays out in the housing market.

The other dynamic that is playing out is fierce competition for refinance business with cash-back offers, and several banks are also offering cash for new mortgages to purchase property.

Bank of Queensland is among them, with a cash-back offer for new home loans set at $3000.

The latest Reserve Bank of Australia data shows housing credit grew 5.8 per cent in the 12 months ended July 31, compared to 3.2 per cent in the prior year.

In contrast, business credit slowed to growth of 2.4 per cent from 3.5 per cent.

Either way, there is still optimism in the housing market.

ANZ retail and commercial executive Mark Hand this week said it was “quite remarkable” that the bank’s economists had edged up their expected national house price growth to more than 20 per cent for 2021.

“Much of last year’s bounce was recovering losses from 2018 and 2019 but the market is looking strong across the board,” he said.

“This time around it’s not just capital cities and we’ve seen strong demand in the regions as people reassess where and how they want to live.

“People are also taking advantage of being able to live in one location and work in another.”

Next year, ANZ’s economists predict price growth will slow to about 5 per cent.

Resimac chief Scott McWilliam on Tuesday said he expected property market strength to “carry forward” in this fiscal year, but cautioned that if growth became unsustainable regulators would intervene.

“If it continues to grow at unsustainable levels, I believe (macroprudential loan limits), that is a realistic outcome. I suppose our view is they’re more likely to pull the lever on macroprudential limits than they are to change monetary policy around interest rates.”

But Liberty Financial boss James Boyle said the non-bank lender was watching for signs of a housing slowdown.

“We’ve gone from being a global leader to a global laggard with regard to Covid-19 management through vaccination. And you’d have to anticipate that that’s going to have backward pressure on consumer confidence and therefore, in the short term, on house prices,” he said.