Last Updated: 5th January, 2022

Ballooning Housing Debt Prompts Talk Of Lending Restrictions From Regulators

Published by Otto Dargan on October 5, 2021

The Australian housing market has an imminent crisis looming. Surging property prices, record-low interest rates and increased lending of high-debt home loans are likely to result in a housing bubble burst due to ballooning housing debt.

The Australian Prudential Regulation Authority (APRA) has hinted towards regulatory policies for curbing high-debt home loans, which means there will be caps on how much lenders will let customers borrow for home-buying, based on their income.

As a rule of thumb, lenders perceive a Debt-to-Income ratio (DTI) of six or more to be risky and rarely allow borrowers to get a loan for more than six times their income.

The Council of Financial Regulators(CFR) states that it is not trying to target home buyers, only trying to ensure that the financial risks to the Australian economy are minimised. APRA and Reserve Bank of Australia (RBA) are not interested in tackling the problems of housing price rises or affordability, but will try to ensure that first home buyers are not harmed unfairly.

Why Do Lending Regulations Seem Imminent?

If lending regulations are not introduced soon, the property market runs a great risk of overheating due to unusually high prices fuelled by high-debt investments at low interest rates, which are driving first home buyers from the market.

The credit volume of the Australian housing market has been growing at an annual rate of 7% in recent months, and is expected to go as high as 11% by year’s end. In comparison, the rate of income growth is only 2% per annum. Additionally, property prices, especially in the major cities, are witnessing a sharp rise despite the pandemic.

Housing prices are expected to be 20% higher by the end of the year.

In the June 2021 quarter, 21% of all home loans were high-debt loans,with experts predicting volatility in the housing market due to the chances of mortgage defaults by borrowers across the country whose loans have them extended way beyond their repayment capacity. Since the income growth cannot catch up to credit growth, borrowers will either start consuming less to repay mortgages or default on mortgages to maintain consumption levels.The stagnation of income and constantly increasing house prices are both bad news for the economy.

What Will Happen If Regulations Are Introduced?

There are a number of regulations the CFR is discussing to curb the stacking up of housing debt without turning home buyers away from the property market. The regulators call these macro-prudential tools that will help decrease financial risks to the economy.

Most recently, the focus has been placed on introducing caps on DTI for investors. Most lenders consider a DTI of 6 a high risk loan.

The CFR explains that the regulation would decrease the borrowing capacity of the growing number of investors in the current market. Most investors have multiple debts for multiple properties, causing them to have high DTIs.

Even with the removal of investors from the market, however, the shortage of housing supply will remain and competition among owner-occupier home buyers will continue to push up prices.

The regulators might target investors only, not wanting to drive up volume for the big banks (this happened in 2014-17 crackdown) or margins (many Australians with investment loans or interest-only loans are still recovering from these).

If a broad cap on DTIs is introduced, however, it is very likely that owner-occupiers, especially Millennial first home buyers, will be pushed out of the market and their chances of home affordability will drop to zero.

How Will Debt Limits Affect Your Chances To Be A Home Buyer?

Lenders hesitate to extend loans six times the income of the applicant, although some do offer them. With new caps, six could become the hard limit or it could fall even lower.

Unfortunately, no matter how little you are able to borrow, you will still have to save a 20% deposit for the house. The consistently increasing house prices will further reduce the chances of an average person owning a home in Australia.

To give an example, the average salary in Australia is $83,000 a year. This would mean an applicant could only borrow $498,000 if lenders do not allow DTIs above 6. The average house price in Australian capital cities (according to Domain) is $837,000. This means that the average person will not have any way to buy at that price.

Suppose a couple living in Sydney earns $166,000 annually, combined; they could borrow just under $1 million. With the average house price nearing $1 million, they will probably have to give up on owning a house.

What Is The Best Course Of Action For A Home Buyer?

From a home buyer’s perspective, the best option would be to get into the property market right now, while there are no caps.

The increasing prices might make it look like waiting to buy is the best option, but as soon as the caps are introduced, even borrowing to buy will be beyond your capacity if you are an average-income applicant. You might be locked out of the property market for a good amount of time, if not forever.

Our expert mortgage brokers understand the needs of first-home buyers with high DTI. Home Loan Experts can help you get into the market while you still can. Call us at 1300 889 743 or fill out our free enquiry form if you are interested in purchasing a house while you still have a chance.