Are Tighter Lending Standards Enough to Cool the Housing Market?

October 26, 2021
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If you’re someone looking to enter the property market for the first time, it may seem a little grim. Housing prices have risen by more than 20% over the past year, the fastest growth since June 1989.

So when is the right time to buy? Should you wait in hope for prices to settle or purchase now before the market continues to heat up? This is the burning question.

How did prices get so high in the first place?

It all started at the height of the pandemic when the Reserve Bank of Australia (RBA) implemented monetary easing measures by slashing interest rates to an all-time low of 0.1 percent and entered into a quantitative easing program to stimulate economic activity.

These measures coupled with government stimuli and the closure of domestic and international borders ultimately resulted in a surge in housing demand.

Overtime, as people continued to purchase property domestically rather than spend their pennies overseas, housing supply on the market declined, further driving up prices.

So what’s the problem?

Apart from struggling to enter the housing market, what’s so bad about rising house prices? Well, lower interest rates ultimately reduce mortgage rates, making housing loans more affordable for the buyer.

This may appear like a benefit, however home loan growth is now superseding income growth, causing RBA concerns over the destabilisation of the financial system.

What does this mean for you?

If you decide to purchase a property at an inflated value in this red-hot market and then prices suddenly crash, your house could be worth far less than your initial loan. The result? Negative equity, and this is bad news for you.

In response to the heated situation, the RBA have urged banks to maintain lending discipline and the Australian Prudential Regulation Authority (APRA) tightened restrictions on home lending in October, with an increase in the minimum interest rate buffer on home loan applications from 2.5 to 3 percentage points.

What’s the bottom line? Should I buy now?

If tighter lending standards turned out to be enough to cool down the market, then considering a purchase may be on the horizon for you in the medium-term. However, realistically speaking, the RBA aren’t planning to increase interest rates until April 2024 and the push from APRA may not be sufficient alone to deter buyers.

On the other hand, it’s also important to consider Evergrande’s turmoil, once China’s second-largest real estate developer, who is currently on the fence of bankruptcy and drowning in over $A400 billion in debt. Given China has stripped back steel production in response to Evergrande’s halt on property development, China’s demand for construction materials has dampened, including iron ore to make steel.

Given a large proportion of China’s iron ore supply is sourced from Australia, lower demand for the resource reduces prices. Ultimately, this could lead to lower construction rates in Australia, reducing the price of houses.

In summary,

there are many factors that come into play when deciding when to purchase your first home. The market is constantly on the move and it’s incredibly difficult to predict the future of property prices. However, keeping abreast of the factors that influence the Australian property market is certainly a place to start. You’ve already made progress by reading the end of this article.

Keep yourself updated with useful tips like these by getting registered on Soho. Not only are we finding you your dream home, but we’re also helping you save for it and decorate it! So don’t forget to swipe on your property matches so we can get you there faster. 

Alexandra Colalillo
Alexandra is an economist and manager at a multinational professional services firm in Western Australia. A key part of Alexandra's role involves assisting clients when responding to fluctuating economic conditions and building strategies to minimise financial and operational uncertainty. She also hosts her own economics podcast - 'The Shady Economist' - designed to break down topical Australian economics and geopolitics.
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