The Local Geelong Property Market
It is time to analyse what the recent changes in the economic landscape mean for the local Geelong property market. The two major factors of influence relate to the recent interest rate change and the influence of APRA.
The Reserve Bank of Australia has recently reduced its current cash rate to an all-time low of 1.25%. Most major banks will pass this on, but the major impact that the reduction of rates will have is on consumer spending. The psychological impact is immediate, the initial impact will be felt in the retail sector. Greater confidence means greater spending, and then this is multiplied through the economy. A change in the cash rate impacts individuals in different ways; the areas impacted most include, loans & mortgages; savings and investments and the value of the Australian dollar.
The impact of a reduced cash rate on loans and mortgages can result in the mortgage holder having reduced repayments resulting in more disposable income, and the lower cost of borrowing money might also encourage people to take out loans and purchase property.
The Benefit: more loans being taken out, for higher amounts.
Those that survive off cash investments will be adversely affected by the reduction in rates, and interest on term deposits etc will be reduced. This may see some of this money invested in real estate where a solid return is currently at 4.5%, whereas cash might only earn 1.5%.
The Benefit: increase in the number of buyers, and greater competition for property, resulting in stronger sale values.
The Australian dollar. When interest rates go down, our economy becomes less attractive from foreign investors, and the value of the Australian dollar decreases. If the AUD falls against other currencies, then imports become more expensive, and exports become cheaper. This will generally have a positive impact in terms of economic activity, but it can also lead to inflation, which is when prices rise.
The Benefit: Prices will rise.
At the end of May 2019, the ABC reported that APRA has flagged lowering the minimum interest rate serviceability buffer from 7pc to a level determined by banks and other lenders. What is APRA? The Australian Prudential Regulation Authority (APRA) is an independent statutory authority that supervises institutions across banking; they regulate the banks and the level of lending. For the past four-and-a-half years, APRA has required banks to test prospective borrowers against the higher of either an interest rate of 7 per cent or a 2 per cent “buffer” over the loan’s actual interest rate, to ensure they could meet repayments if rates rise.
The regulator also asked banks to ensure borrowers were “comfortably” above these thresholds, which has meant most banks test whether customers can manage repayments if interest rates hit 7.25 per cent, which is much higher than the actual mortgage rates, currently sitting below 4 per cent for many owner-occupier borrowers.
APRA says proposed change gives ‘flexibility’ and in a letter to authorised deposit-taking institutions (ADIs/ Banking institutions), APRA said ADIs could be permitted to review and set their own minimum interest rate floor. However, ADIs would need to apply a mandatory interest rate buffer of 2.5 per cent. For example, a current rate of 3.77% (current ANZ home loan rate), plus the 2.5% buffer would allow servicing to be based on an interest rate of 6.27% instead of 7.25%.
What this means is that the change could see more Australians getting a mortgage, an increase in borrowing capacity for existing mortgage holders, and leveraging their position to secure a better deal with their institution.