Could rising floor rates help cool the "ridiculous" property market?
Outsource Financial CEO Tanya Sale is “stunned” by Australian property prices – and she is not the only one. According to CoreLogic, national dwelling values have risen by more than 10% over the last calendar year despite the uncertainty of a pandemic bringing job losses, border closures and snap lockdowns.
In the harbour city, new price records have become passe, with even unlivable properties selling for millions. On a state-wide basis, the average home value in NSW has pushed higher than $1 million and it is estimated to take at least nine years for the national median household to save a 20% deposit, according to CoreLogic data from September.
While the Commonwealth Bank’s recent move to hike its floor assessment rate is likely to be followed by other lenders, whether or not this slows down the raging property market remains to be seen, said Sale.
Read more: More lenders to raise floor assessment rates
“I don’t know if it will slow things right down,” she told MPA. “I think there will be some adjustment in the market. What will happen is, if interest rates start going up, that will definitely start affecting the market.”
Sale said CBA raising its floor rate was a positive thing in an “outrageous” market.
“It’s actually quite ridiculous what’s going on at this point in time,” she said. “While it’s fantastic for mortgage lending, it’s fantastic for our industry, it’s not going to be fantastic if in two years’ time we find ourselves in a situation where we have to try and refinance people.”
Those desperate to refinance to more affordable interest rates will have limited options by this stage, said Sale, with rates currently the lowest they have ever been.
“What you’re seeing now, it’s – I say the word outrageous, because I’m actually stunned by property prices,” she said. “People are paying way over the odds for a property. You get properties that are usually worth about $1 million selling in the high ones, or $2 million.
“Where are these people getting this money from for a deposit? Something has to happen because it cannot keep on going the way it’s going. It’s pricing the normal, general consumer out of the property market.”
According to CoreLogic head of Australian research, Eliza Owen, if more banks raised floor assessment rates it would likely limit the purchasing capacity of some borrowers, thus potentially slowing real estate transaction numbers and value increases.
“APRA has recently written to major banks to seek assurance that banks are maintaining risks in home loan portfolios, in an environment where national dwelling values have risen 10.1% in the calendar year to date alone,” she told MPA. “An increase to serviceability buffers would also potentially mitigate higher risk in the real estate market in the long run – for example, by preventing higher sell offs in real estate amid unserviceable mortgage rate rises.”
But this won’t necessarily bring property prices down, she said.
“In the short term, I think this move would further slow down momentum in the growth rate of housing, but might not be enough to trigger price falls,” she said. “This is because borrowers may not have been borrowing to full capacity before the lift in serviceability anyway, so the impact this has on reducing demand might not be enough to change the direction of house prices.”
While a slowdown in the rate of growth would be good news for first home buyers struggling to save a deposit, tighter lending standards could impact first home buyers more, since they tend to have smaller deposits and lower incomes, she said.