Measuring Borrowing Capacity – A New Index
/Given the high volatility in home loan interest rates and frequent changes to lending criteria over the past few years Loanscape has created a new index to monitor the changes in borrowing capacity for prospective home buyers. It also highlights how weak lending regulation, or government inattention can strongly impact Australian property markets.
The Loanscape Borrowing Capacity Index is a direct measure of the relative change in borrowing capacity for singles and couples among a basket of lenders. It factors in:
variable and fixed interest rates
changes in lending policies of major 1st and 2nd tier lenders
changes in lending regulations mandated by the Australian Prudential and Regulating Authority (APRA)
household expenditure as measured in the Household Expenditure Measurement Survey (HEM)
average family incomes for professionals and non-professionals
changes in lender discounting
The index has been created using data in 6 monthly intervals over the past 4 years and going forward will continue to be updated quarterly.
The index value is normalised to borrowing capacities in July 2021 which coincides with the peak borrowing capacity resulting from record low interest rates and the most liberal lending rules in the last 40 years. For example, a couple which could borrow up to $600,000 in July last year would now be subject to a ceiling of $443,000 and this is expected to drop further over the next 3 months.
The Loanscape Borrowing Capacity Index shows how strongly regulator actions can influence the housing market and the real intended (and unintended) impacts of these changes:
The capacity trend has a strong correlation with the recent boom in house prices in the major capital city housing markets in Sydney and Melbourne
It shows that borrowing capacities are now 27% lower than at the peak in October 2021 and are at their lowest level in 3 years
It shows the direct impact of recent changes in lending regulations such as the dramatic lowering of floor interest rates in 2019 and the mandate of a minimum 3% buffer rate imposed by APRA in October 2021.
The index also points to the reason that many people who borrowed at the market peak may now be “mortgage prisoners”, unable to refinance their home loan due to not being able to re-qualify for the same loan under current lending criteria.
Many commentators have been pointing the finger at Reserve Bank of Australia governor, Philip Lowe for his market commentary over the past 12 months and its purported impact on borrowers. Some of his comments may have been injudicious but it is not the RBA’s role to regulate lending. They were always going to lift interest rates once the economic impact of COVID-19 had dissipated.
Greater scrutiny needs to be directed at APRA and the banks which presided over a boom in lending which enabled the property market to overheat during 2020/21. It acted far too late and too modestly to the borrowing boom - a classic case of the gate being closed after the horse had bolted from the paddock.
Many Australians are now living with the consequences of this boom whether they be first home buyers trying to break into an inflated market, or recent borrowers with very large loans and rapidly rising interest rates. Many have short term protection through rates fixed through to late 2023 or 2024 but will feel the whack when their loans roll over at a 3 to 3.5% premium to their current rate.
Copyright and disclaimer notice
In compiling this index, Carr Financial Services Pty Ltd trading as Loanscape has relied upon information published by a number of external sources. Loanscape does not warrant its accuracy or completeness. To the full extent allowed by law Loanscape excludes liability in contract, tort or otherwise, for any loss or damage sustained by any person or body corporate arising from or in connection with the supply or use of the whole or any part of the information in this publication through any cause.
