Australians earning average salaries could soon struggle to get home loan approval to buy a house in Sydney or Melbourne under a looming mortgage crackdown that could drive down property prices.
Houses in Australia’s two biggest cities are typically selling for more than $1million which would put them out of reach for a single borrower earning an average, full-time salary of $90,329.
A typical Sydney couple with kids earning a combined income of $137,600, with one parent working part-time, would be unable to get a loan for an ordinary, mid-market house with a backyard.
That’s because the Australian Prudential Regulation Authority, the banking regulator, considers a debt-to-income ratio of six or more to be risky, especially when national home prices are surging at 20 per cent – the fastest annual pace since June 1989 as wages barely grow.
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Australians on average salaries could soon struggle to get home loan approval to buy a house in Sydney or Melbourne under a mortgage crackdown. Houses in Australia’s two biggest cities are typically selling for more than $1million which would put them out of reach for a potential borrower earning an average, full-time salary of $90,329 (pictured is Constitution Hill in Sydney’s west)
In just one year the proportion of new loans where borrowers owed the bank six times more than they earned before tax soared from 16 per cent to 21.9 per cent, as of June 2021.
At that level, borrowers are more likely to be in mortgage stress where they can barely meet their monthly mortgage repayments after paying their other bills and living costs like food and petrol.
The Council of Financial Regulators – which includes APRA, the Reserve Bank of Australia, Treasury and the Australian Securities and Investments Commission – confirmed on Wednesday it was exploring tougher new lending rules.
‘The Council is mindful that a period of credit growth materially outpacing growth in household income would add to the medium-term risks facing the economy, notwithstanding that lending standards remain sound,’ it said.
Real estate values have continued to surge, despite lockdowns in Sydney and Melbourne, as home sellers delayed putting their house on the market, reducing the choices among potential buyers looking to relocate for more space and a backyard.
Treasurer Josh Frydenberg on Tuesday flagged tighter rules targeting the debt-to-income ratio of borrowers after the International Monetary Fund warned of financial stability risks from surging Australian property prices as interest rates remain at record lows.
Financial comparison group RateCity said Australia’s banking regulator was more likely to introduce stricter rules on debt-to-income ratios to prevent borrowers from taking on risky levels of debt.
While owner-occupier borrowers are dominating the mortgage market, investors are also returning, which could also see restrictions on speculators buying multiple properties to rent out.
In just one year, the proportion of new loans, where borrowers owed the bank six times more than they earned before tax, soared from 16 per cent to 21.9 per cent, as of June 2021. At that level, borrowers are more likely to be in mortgage stress where they can barely meet their monthly mortgage repayments after paying their other bills and living costs like food and petrol (pictured is a Strathfield auction in Sydney’s inner west in May before lockdown)
Why home lending rules are set to change
The Australian Prudential Regulation Authority is concerned when a borrower owes the bank more than six times what they earn
At that level, someone is at risk of being unable to meet their monthly mortgage repayments, typically spending close to 40 per cent of after-tax pay on servicing their loan
In June, 21.9 per cent of new loans had a debt-to-income ratio of six or more – up from 16 per cent in June 2020
APRA, the banking regulator, acts to stop the market from overheating and causing a property bubble
It did this in 2017 following a 68 per cent surge in Sydney property prices over five years but this caused prices to fall 15.3 per cent over two years
Apart from a Covid interruption in early 2020, the market surged again and is at record highs
The 20.3 per cent national annual surge was the fastest since June 1989
The last time APRA cracked down on home loan rules, Sydney house prices fell by 15.3 per cent or $160,000 between July 2017 and May 2019.
Median prices dived from just over $1million to $880,000.
Back then, investors had dominated the market causing property values in Sydney to surge by 68 per cent in the five years from 2012.
The banking regulator responded by cracking down on interest-only and investor loans but the downturn was only short-lived.
A 15.3 per cent plunge now would see Sydney’s median house price dive by $198,000.
Since the end of 2020, owner-occupiers have dominated real estate, with record-low interest rates and the ability of more professionals to work from home in August seeing house price records set in 88 per cent of Australia’s property markets.
Digital Finance Analytics principal Martin North said the problem of borrowers having too much debt would get worse if the problem wasn’t tackled sooner.
‘The Reserve Bank and APRA should be intervening – they should be intervening soon,’ he told Daily Mail Australia.
‘It’s much harder to fix the problem if it gets worse later and house prices are very high already but they could go even higher.’
Mr North tipped a 10 per cent drop in Sydney and Melbourne house prices, over 12 to 18 months, if new lending rules were brought in, but feared a bigger 20 per cent drop in outer suburbs like Liverpool and Campbelltown in Sydney’s south-west, where mortgage stress levels were higher because borrowers typically owed the bank eight times what they earned.
Aussie Home Loans founder John Symond said the banks were more likely to tighten lending rules themselves rather than waiting for the regulator
‘There are some people getting loans at eight times income at the moment or more – that really is too high on any measure even with low interest rates,’ he said.
‘Without macroprudential controls, that will allow house prices to continue to bubble higher, people are getting much bigger mortgages than previously.
‘We are close to the limit given the current income profile of households relative to the property prices.’
Aussie Home Loans founder John Symond said the banks were more likely to tighten lending rules themselves rather than wait for the regulator with price increases geographically widespread.
‘The last thing a bank wants to do is have a problem account and look at the possibility of having to turf people out of their homes,’ he told Daily Mail Australia.
‘The price increases haven’t been confined to CBD popular suburbs of the big cities – it’s overflown into regional areas where people look at the Covid situation.’
RateCity research director Sally Tindall said lending rules needed to be tightened to prevent the market from overheating without locking out younger people and first-home buyers.
Digital Finance Analytics principal Martin North said the problem of borrowers having too much debt would get worse if the problem wasn’t tackled sooner
‘Measures designed to curb people’s borrowing power will help prevent some from taking on risky levels of debt, however, first home buyers must be supported in the process,’ she said.
‘Any regulation changes must make provisions for younger Australians to still be able to enter the housing market.’
RateCity research director Sally Tindall said lending rules needed to be tightened to prevent the market from overheating without locking out younger people and first-home buyers
In the year to September, Australian property prices surged by 20.3 per cent, the fastest annual pace since June 1989, as wages grew by just 1.7 per cent, CoreLogic data showed.
Australia’s median property price is $674,848, covering houses and apartments in both capital cities and regional areas.
Someone earning an average, full-time salary of $90,329 would have a loan of $539,878 after saving $134,970 for a 20 per cent mortgage deposit.
At that level of borrowing, a single man or woman paying off a mortgage would have a debt-to-income ratio of six.
The median capital city price is $759,753. After a 20 per cent deposit of $151,951, that’s a $607,802 loan.
Someone on $90,329 a year would have a debt-to-income ratio of 6.7.
Sydney’s median house price during the past year has surged by 26 per cent to $1.312million.
A single person on an average salary would have a debt-to-income ratio of 11.6, a very risky level that could see someone default should interest rates rise.
Sydney’s mid-point price would buy a house at Toongabbie in Sydney’s west.
In the year to August, Australian property prices surged by 18.4 per cent, the fastest annual pace since July 1989, as wages grew by just 1.7 per cent, CoreLogic data showed (pictured is a house at Kellyville in Sydney’s north-west)
But couples where one parent works full-time as the other does part-time hours to raise the children are more likely to earn $137,615 between them, a RateCity analysis of Australian Bureau of Statistics data showed.
A mum and dad in this situation would be unable to afford a Sydney house with a median price of $1.3million.
Even with 20 per cent mortgage deposit of $262,328 to borrow $1.049million, they would have a dangerous debt-to-income ratio of 7.6.
Instead, they would have to settle for a $1.034million house at Blacktown.
With a 20 per cent deposit, they could borrow up to $824,316.
Beyond that, they would have a debt-to-income ratio of more than six.
To avoid mortgage stress, they would have to move further away from the city to a suburb like Mount Druitt where a house costs $800,000.
Melbourne’s median house price surged at an annual pace of 15.6 per cent to $954,496.
After a 20 per cent mortgage deposit of $190,899, a couple paying off a $763,597 loan would have a debt-to-income ratio of 4.2, which is manageable.
But for a single person, that debt-to-income ratio of 8.5 would be risky.
The Reserve Bank of Australia last year cut the cash rate to a record-low of 0.1 per cent, vowing to leave it there until 2024, and the big banks are offering fixed mortgage rates of 2 per cent.
Standard variable rates, however, could increase sooner if global money market funding costs unexpectedly increased, like the Global Financial Crisis of 2008.
Veteran financial commentator Robert Gottliesbsen said mortgage rules crackdown could even cause the market to keep climbing (pictured are houses at Cecil Hills in Sydney’s south-west)
Mr Symond said the banks typically sourced half their funding from overseas to lend out to Australian home borrowers.
‘I can’t see interest rates going to 6, 7 per cent for probably a decade but there’s always a risk – when we went through the GFC where money markets shut down,’ he said.
‘Over half of it comes from offshore.
‘This is why people used to whinge: they say, ‘Hang on, the Reserve Bank hasn’t increased rates and yet the banks increase their rates’.
‘It creates a furore.’
Veteran financial commentator Robert Gottliebsen said mortgage rules crackdown could even cause the market to keep climbing.
‘Sadly it’s too late – the horse has bolted – and given the frenzy in the residential market and the Covid-induced supply shortages it might even accelerate short-term buying,’ he said in a column for The Australian.