New cohort of buyers expected as banks told to relax lending restrictions

Developers and investors are set for a field of new customers as banks receive instructions from the prudential regulator to reduce lending barriers for first home buyers.

The Australian Prudential Regulation Authority (APRA) have written to the major banks requesting a relaxing of serviceability measures, in particular a relaxing of lending requirements that assessed borrowers’ ability to repay loans at 7.25%. This call out could see the assessment ease by up to 100 basis points.

APRA chairman Wayne Byres noted that the request comes in light of the current low-interest-rate environment.

“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7% floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so,” Mr Byres said.

Mr Byres has suggested a buffer of 250 basis points to be applied, which means a home buyer who has secured a rate of 3.8% will be assessed against their capacity to repay a loan at 6.3% (not 7.5%).

ANZ chief Shayne Elliott welcomes the change, believing that the buffer had passed its use-by date. The same sentiments were echoed by Yarra Capital senior investment manager Edward Waller, who said that the change would remove an artificial handbrake on lending and increase banks’ ability to lend.

“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 told The Australian Financial Review.

This news, coupled with the surprise re-election of the federal government, has bolstered the bank share prices and renewed confidence in the marketplace.

“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,” said Mr Waller.

APRA's introduced their serviceability buffers back in December 2014 and has stated through this time that they were designed to be maintained through the cycle.

DB analyst Matthew Wilson and UBS economist George Tharenou expressed some surprise at the decision, with Mr Wilson suggesting that housing conditions “must be far worse than is apparent in the public data.”

It remains good news for new buyers (and developers) however. Mr Tharenou noted that with the current alterations we could see an increase in borrowing capacity by about 8%. If the RBA cuts rates and mortgages fall to 3.5% however, that borrowing capacity could go up by as much as 14%.