{"id":15959,"date":"2021-10-05T10:11:18","date_gmt":"2021-10-04T23:11:18","guid":{"rendered":"https:\/\/www.prosolution.com.au\/?p=15959"},"modified":"2021-10-06T09:57:29","modified_gmt":"2021-10-05T22:57:29","slug":"tightening-in-lending-rules","status":"publish","type":"post","link":"https:\/\/wealthcoach.com.au\/stage\/tightening-in-lending-rules\/","title":{"rendered":"Tightening in lending rules unlikely to impact investment-grade property"},"content":{"rendered":"\n
\"tightening<\/figure>\n\n\n\n

Update<\/strong>: On 6 October 2021, the regulator announced<\/a> that banks must now test whether a borrower can afford a loan based on principal and interest repayments at current rates plus a buffer of 3% (previously 2.5%). As this measure requires a cash flow analysis, we feel it’s more meaningful than imposing a debt-to-income ratio cap (as discussed below). <\/span><\/p>\n\n\n\n

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Federal Treasurer, Josh Frydenberg has asked the Council of Financial Regulators<\/em><\/a> to investigate the fact that credit growth is materially outpacing growth in household income and to advise on any policy responses.<\/p>\n\n\n\n

In lay terms, the Treasurer is worried that people are borrowing too much money compared to their incomes and that could be risky for the economy.<\/p>\n\n\n\n

Increase in home lending is pronounced<\/h3>\n\n\n\n

It has been well documented that house prices in Australia have been rising at a fast pace over the past year. But this isn\u2019t unique to Australia. This is also a global phenomenon, as illustrated in Knight Frank\u2019s Global House Price Index<\/a> report released last week. This report ranks the house price growth in 56 countries and Australia ranks 18th<\/sup>. <\/p>\n\n\n\n

It is higher loan volumes that have caused higher property prices. The ABS chart below shows that most of the increase in lending has been driven by owner-occupiers (being the dark blue line), not investors.<\/p>\n\n\n\n

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The monthly volume of home loans has been rising significantly since mid-2020. The average volume of lending between December 2020 and August 2021 was $21.7 billion per month. The average for the 10-year period prior to June-2020, was only $11.6 billion per month.<\/p>\n\n\n\n

Approximately 60% of the increase in lending over the past 9 months has been driven by an increase in the number of borrowers. And 40% has been driven by an increase in the average loan size i.e. people borrowing more. This makes sense as higher income earners have largely been (economically) unaffected by the Covid lockdowns.<\/p>\n\n\n\n