A move by the Federal Treasurer Jim Chalmers to get banks to overlook student debts when assessing applications for home loans and to make it easier for developers to access finance for apartment projects could help reinvigorate a slowing housing market.
With most analysts tipping the Reserve Bank of Australia will finally begin cutting interest rates at its board meeting next week, easing lending rules could unlock the borrowing power of thousands of younger potential property buyers, keen to enter the market.
Increased borrowing power
Would-be home buyers who have outstanding HECS or HELP higher education loans could find it easier to get a mortgage after Treasurer Jim Chalmers directed financial regulators to relax lending rules.
Dr Chalmers described the changes as “common sense”.
“We've asked the regulators and the banks to take a more reasonable approach to student debt, recognizing that student debt is different to other kinds of debt,” he told ABC News.
Following a request from the Treasurer, financial regulators have issued advice to banks that they can disregard student debt repayments when assessing an applicant's ability to service a mortgage, on the condition that the applicant is likely to pay it off in "the near term".
“I've met with both of the relevant regulators here,” Dr Chalmers said.
“I've convened a meeting of the major bank CEOs to make sure that we apply these common sense changes to the regulations.
“This is about getting more people into homes and building more homes.”
While the Treasurer did not put a figure on how many prospective homebuyers had been knocked back for home loans as a result of their student debts, it’s a fact that around three million Australians have an outstanding HECS-HELP debt.
Universities Australia, which has lobbied for the changes, described them as a “no-brainer”.
“No one should have to choose between owning a home and attending university,” Luke Sheehy, UA’s Chief Executive, said.
“This is a practical change that will ensure university graduates are treated fairly when they want to buy a house.”
Master Builders Australia said the changes would encourage more investment and tackle housing supply and affordability challenges.
“Higher Education Loan Program (HELP) repayments are unfairly weighted in serviceability assessments and restrict the ability for first-home buyers to purchase a home,” Master Builders CEO, Denita Wawn, said.
The Australian Bankers’ Association was more cautious.
“Banks support responsible lending rules to protect borrowers and ensure they can repay their loans,” Chief Executive Anna Bligh said.
“However, there is always merit in carefully considered updates to regulatory guidance that may help some Australians safely access more credit.”
The move could substantially increase the amount of money retail banks would be able to lend borrowers who’ve undertaken a higher education course.
Modelling by the National Australia Bank provided to a senate committee late last year estimated that disregarding a person’s HECS-HELP debt could add about $90,000 to their borrowing capacity, with even more for graduate couples.
The NAB scenario was based on a first-home buyer, earning $125,000 per annum, who had an average student debt balance of $26,500, normal expenses and held one credit card with a $5,000 limit.
Even with the current 3% “serviceability buffer” remaining in place, NAB found that a single graduate would now be able to borrow $587,000 - up from $497,000 if their student debt was included in their loan assessment.
The $90,000 extra boost in borrowings for a single graduate whose student debt is disregarded compares extremely favourably to the much smaller increase in borrowing power that would be achieved by a cut in the RBA cash rate.
According to recent research by Aussie Home Loans, “if 0.25% is carved off the top of mortgage rates, it equates to around $13,000 more being added to the average Australian first-home buyer’s borrowing power.
“In cities like Sydney and Melbourne, this additional borrowing capacity could be the difference between purchasing a one-bedroom versus a two-bedroom apartment.”
Green light for more apartments
Treasurer Jim Chalmers says he’s also asked the Australian Prudential Regulation Authority, which has carriage of bank lending rules, to “update and clarify its regulatory guidance to help unlock the construction of more units”.
The Treasurer has indicated that some developers who had sought financing for apartments had been knocked back because of the way lending rules had been interpreted.
Some banks apparently believed the rules meant that all units had to be pre-sold off the plan to customers before they agreed to fund the actual costs of building the project.
“Some lenders have interpreted advice issued by APRA in 2017, that finance for construction of new unit blocks should depend on all properties being pre‑sold,” he said.
“Lenders have indicated this is a barrier to financing.”
Dr Chalmers said the “interpretation of this guidance as “100% pre‑sales” by some lenders has limited housing supply, as smaller developers often don’t have the capital to finance the start of construction without support from the banks.”
Mike Zorbas, the Chief Executive of the Property Council, said the easing of finance restrictions on apartment developments struck the “right balance”.
"Many Australians need more apartment living options around jobs, opportunities and transport.
"Australian apartment construction is half the volume it was in 2017/2018,” he said.
"We have been warning federal and state governments that investment settings in the high-density living they say they want are actually a handbrake on new construction.”
The take out
Data analytics firm PropTrack recently reported that its national Home Prices Index eased 0.08% in January, led by small falls in 6 out of the 8 capital cities.
However, it also said the price falls seen across Australia in the last two months “could be short-lived”.
“Affordability challenges, weaker economic conditions and the sustained higher interest rate environment have also been contributors to slowing – and reversing – growth,” PropTrack Senior Economist Eleanor Creagh pointed out.
“With interest rate cuts on the horizon, the price falls seen over the past two months are likely to be short-lived.”
Now that the borrowing power of thousands more potential Australian property buyers has suddenly been unlocked, that statement looks even more pertinent.