The Coalition’s Election Promise of First Home Loan Deposit Scheme
One of the Coalition’s proposed policies that will have direct impacts on the property market is the new $500 million First Home Loan Deposit Scheme, set to start on January 1st, 2020. The scheme aims to help first home buyers get a foot in the property market, as well as smoothing the decline in home ownership among younger Australians. Under the Scheme, the government would guarantee, for 10,000 first home buyers, three-quarters of the usual 20 per cent deposit required by mortgage lenders, giving them the opportunity to buy their first home with only a five per cent deposit. It also means that individual first home buyers with less than $125,000 annual income, or couples earning less than $200,000 a year, could save over $10,000 by not having to pay the lenders mortgage insurance that is normally required when a purchaser has a deposit of less than 20 per cent.
Overall, the scheme is expected to strengthen demand for housing and push up prices for everyone in the property market, not just the first home buyer’s housing segment itself. While the scheme will not set off until the beginning of next year, this positive effect on Australia’s housing market is likely to take effect almost immediately. This is driven by the fact that a number of first home buyers who are qualified to participate in the scheme would enter into pre-sales housing contracts now, in anticipation of the settlement benefits from the new scheme next year.
RBA Proposed Rate Cuts
In light of the increasing concern over the weak economy growth, rising unemployment rate and housing market downturn, Reserve Bank has been considering to lower interest rates this year, which could take the official cash rate down to 1 per cent. It is likely that this proposed rate cut will translate into lower mortgage rates and higher debt serviceability, boosting housing demand via improving individual’s housing purchase capacity and enabling them to step foot inside the property market. Additionally, lower interest rates help stimulate investment activities, for instance, in highly secured investment products such as real estate lending, because savings in the bank will now deliver substantially lower returns compared to the past. This increase in investment activity level will be further escalated by the certain continuation of the “old” negative gearing and capital gain tax policies, which Labor Party previously proposed to amend in their election campaign.
In general, the expected heightening activity level of both individuals and investors in the real estate market would boost housing demand, supporting a recovery of housing prices in the medium-term.
APRA Proposed Amendment to Mortgage Lending Guidance
For the past four-and-a-half years, APRA has required banks to test borrowers against the higher of either an interest rate of 7 per cent, or a 2 per cent “buffer” over the loan’s actual interest rate, to ensure they could meet repayments if rates rise. Recently, APRA has proposed to remove this 7 per cent interest rate floor, allowing ADIs to set their own interest rate hurdle for serviceability assessments (while still maintaining responsible lending practices). This is partially because the interest rate has been at record lows and in anticipation of RBA’s rate cuts this year, the gap between 7 per cent and the actual mortgage rate borne by borrowers is already substantial and will be significantly widening, suggesting that the 7 per cent rate has become outdated. Additionally, the different pricings of various loan types (for example, interest-only loans versus principal-and-interest loans) indicate one uniform interest rate hurdle is no longer applicable for serviceability assessments. This proposed amendment is expected to support housing credit growth and further slow down the declines in housing prices, as Australians would have the ability to take out more and bigger loans in the near future.
Conclusion
While the Coalition’s election victory, RBA and APRA moves are expected to generate positive impacts on Australia’s Property Market in general, there are some considerations to keep in mind. All of this news is now known and likely to be priced in somewhat to markets, delivery of promises is still needed to avoid disappointment and negative impacts, and the timing of delivery is also important.
Reference
https://www.abc.net.au/news/2019-05-21/reserve-bank-poised-to-cut-interest-rates-in-june/11134160
https://www.abc.net.au/news/2019-05-20/expected-pressure-points-following-election/11128656
https://www.afr.com/news/economy/labor-loss-to-deliver-a-positive-property-shock-20190519-p51ow6
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