Australian house prices have been falling since mid 2017, but today the banking regulator APRA just handed homeowners and property investors some great news likely to see Australian house prices head higher once again in 2019.
The regulator scrapped its rule that lenders must assess home loan applications on the basis that the borrower is able to pay back the loan at an interest rate of 7%. This rule had prevented major lenders such as the Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) from extending as much credit to home buyers.
The less applicants are permitted to borrow, the less they can afford to spend on a property so new rules that mean banks will be able to set their own interest rate floors for use in serviceability assessments should theoretically send Australian house prices higher once again in 2019.
APRA has stipulated the banks must use an interest rate buffer of at least 2.5% over the loan's rate to help avoid mortgagor's defaulting. It has justified the move on the back of the RBA taking benchmark lending rates to a record low 1%.
In other words the 7% buffer is now too big a spread on real world mortgage rates given that according to Finder.com most mainstream banks and lenders will now offer mortgage rates between 3%-3.5%.
Shares in all four big banks are marginally higher on today's news and the radical move to give the banks freedom to regulate their own serviceability assessments is a symptom of falling house prices, feeble inflation, and the RBA's response to these factors.
APRA will also be aware that the banks will pump less credit into the economy unless they can do so at more profitable risk-adjusted rates on their own assessments of serviceability, with there being no more profitable business for banks than home loan lending. As such the banks will likely be chomping at the bit to hand out loans to borrowers like its 2015 all over again.
Given the RBA's rate cuts, the Coalition government's election win, and APRA's radical policy move then Australia's house prices could not have anymore macro or policymaker support going into the second half of 2019.
As such if we don't see prices edge higher many will take it as a bearish sign that a house of cards built on excess credit and loose regulation will collapse in the next few years.
