As the market seemingly gears up for interest rate cuts, many hopeful home buyers might expect 2024 to be the year they finally secure a property.
But interest rates are only part of the housing affordability puzzle.
Another major factor is the mortgage serviceability buffer, which determines how banks assess whether a would-be borrower can afford their home loan repayments.
The buffer is determined by the Australian Prudential Regulation Authority (APRA) and helps to ensure market stability.
It currently sits at 3%, having been bumped from 2.5% in 2021 amid anticipation of rate hikes.
The extra 50 basis points added onto it in 2021 likely reduced a typical homebuyer’s borrowing capacity by 5%, APRA estimated at the time.
As rates now appear to have peaked, some seem to be wondering if APRA will consider clawing back the mortgage serviceability buffer.
“Potentially we could see APRA adjust the buffer back to its previous setting of 2.5% as interest rates fall,” CoreLogic’s latest Home Value Index (HVI) reads, before noting there’s no guarantee such will happen.
Domain also made mention of a change to serviceability buffers in its 2023 End of Year Wrap and 2024 Outlook report, saying lowering the buffer could increase demand for housing and thereby drive prices higher.
So, what will it take to encourage the financial watchdog to reverse course on home loan serviceability tests?
APRA might consider lowering the buffer if the property market cools in 2024, AMP chief economist Shane Oliver told Savings.com.au.
“If the property market doesn't look overly hot and mortgage rates look like they’ve peaked, then there is a good chance they'll cut it,” he said.
However, if the current level of demand for property were to continue, the buffer will likely remain where it is, he noted.
Domain chief of research Nicola Powell doesn’t believe the buffer will be lowered, saying slashing it would provide an upwards boost for the property market.
“[The buffer] insulates the ability for people to actually repay their mortgages if interest rates rise,” Dr Powell told Savings.com.au.
“If the serviceability buffer is reduced, it will improve borrowing capacities.
“That in itself adds risk to the housing market, because it could speed up market access for some.”
Improving housing affordability could send prices soaring, thereby encouraging buyers to take larger risks in order to secure a property.
While it isn’t APRA’s job to regulate the housing market, the watchdog is charged with supervising the financial system.
“APRA’s not interested in whether house prices are expensive or cheap,” Dr Oliver said.
“But it would be concerned if it were to see too much risk being taken in the property market, which could lead to a situation in which people with a mortgage can't service their loans.”
Right now, affordability appears to be containing house price growth, Dr Powell notes, but only enough to keep it within Domain’s single-digit forecast for this year.
Considering the current serviceability buffer, an owner occupier applying for a new variable home loan with an average interest rate – 6.24% per annum in December – must be able to meet their repayments if their rate were hiked to 9.24% p.a.
APRA holds mortgage serviceability buffer in December
The prudential regulator chose to hold the serviceability buffer at 3% in December.
“APRA currently believes its guidance regarding a uniform 3% minimum serviceability buffer remains appropriate,” a spokesperson told Savings.com.au.
“However, APRA closely monitors economic conditions as it continually reviews the appropriateness of its macroprudential settings.
“Should risks to financial stability change, APRA will adjust its macroprudential policy settings accordingly after careful consideration and consultation with other agencies on the Council of Financial Regulators.”
Interest rate cuts: Bane or boon to serviceability tests?
Whether interest rates or the mortgage serviceability buffer (or both) will fall in 2024 remains to be seen.
CoreLogic believes keeping the serviceability buffer at 3% or increasing loan-to-income ratio or debt-to-income ratio limits could reduce the likelihood of a housing market surge if interest rates were to fall.
On the other hand, Dr Oliver notes that if the property market were to cool amid rising unemployment, a slowing economy, and continuously high rates, reducing the buffer could make sense.
Consensus among experts appears to be that the Reserve Bank of Australia (RBA) has hiked the cash rate – a major determiner of interest rates – for the last time.
Its next move is expected to be a cut, with many predicting that will come later this year.
AMP predicts the first cash rate cut will come in June, with the rate falling from 4.35% to end 2024 at 3.6%.
CommBank, NAB, Westpac, and ANZ tip the RBA to announce its first cut in the final quarter of the year.
Image by LinkedIn Sales Solutions on Unsplash
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