Borrowing Capacity Index – August 2024

/ LOANSCAPE/

Loanscape has today released its Borrowing Capacity Index for Q4/2024. It confirms the forecast trend that borrowing capacities of Australian individuals and families are recovering from their low levels which coincided with the last of the recent increases to borrowing rates initiated by the Reserve Bank of Australia. The main outcomes:

  • Maximum borrowing capacities remain 24% lower than at their peak in October 2021.

  • Capacity continues to recover modestly - the index has gained 7.5 points over the past 9 months.

  • Fixed interest rates trends suggest further improvement in borrowing capacities in the next 3 to 6 months

  • Several lenders have relaxed their lending criteria leading to further capacity increase of approximately 6% for borrowers looking to purchase or refinance a strata titled apartment

According to AFG data published in July average loan size in Australia has increased by 1.9% during the past quarter. This increase has been driven by stronger increases in NSW (2.5%), QLD (2.9%) and WA (3.7%).

Consequences for Borrowers and the Property Market

  1. The factors driving increase to borrowing capacity are:
    - increases to net incomes flowing from the tax cuts which rolled out on 1st July
    - a relaxation in lending criteria, particularly for apartment purchasers, as lenders seek to maintain or boost lending volumes in a slowing property market.

  2. The family income required to take out the average sized home loan in February 2022 was $106,500. This remains 33% higher at $142,000 in August 2024.

  3. There remains a strong disparity between calculated borrowing capacity and average loan size. While borrowing capacity is down 24% from the market peak the average loan size has remained constant or increased in most states. In Queensland, South Australia and Western Australia loan sizes have increased by 10% in the same period. This suggests that lower income borrowers remain the most severely impacted.

  4. Prospective first home buyers remain particularly affected: they now comprise only 12% of all mortgage applications. Government initiatives ostensibly aimed at supporting them (or at least garnering their votes) such as stamp duty relief, and the First Home Guarantee Scheme are actually making home ownership less attainable for the majority. Shared equity schemes will only throw more fuel on the same fire, albeit they allow facilitate access to housing equity for a category for individuals and couples who have no alternative to renting.

Forecast

Our forecast is for borrowing capacity to stay relatively flat over the coming 3 months. This is based on assumptions that:

  • RBA cash rate will remain unchanged (this is the forecast of all of the 3 of the 4 major banks)

  • Lender discounting to remain at its current levels

  • Inflation and wage movements are expected to continue on their gradual downward trends

The Loanscape Borrowing Capacity Index is an expression 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.

  • Changes to income tax rates