Disheartened FHBs warned not to overstretch home loan borrowings: RBA's Luci Ellis

Disheartened FHBs warned not to overstretch home loan borrowings: RBA's Luci Ellis
Disheartened FHBs warned not to overstretch home loan borrowings: RBA's Luci Ellis

Luci Ellis, the head of the RBA's financial stability department, hopes Australians can see an upswing in housing prices in the larger metropolitian centres and say, ‘I don't have to buy into that. I don't have to stretch my finances’.

Not that Australian household finances are looking too stretched at the moment.

"And we'd like to see it stay that way," Luci Ellis said.

Her speech to the CITI Residential Housing Conference noted that the 15 years to 2005 saw housing prices rise noticeably faster than incomes.

"This was in large part a transition to a new equilibrium of lower inflation and interest rates, and thus higher debt and housing prices relative to incomes. That transition is over now. Housing prices are therefore going to be cycling around a slower trend than they did in the past. There will be more periods where prices are falling a little in absolute terms," she said.

The means that there was "less scope for rising markets to cover mistakes if you fall in love with a property and overpay for it".

"It means there is little room for another round of property exuberance of the type we saw just over a decade ago, in 2002 and 2003. Australia managed to have its housing boom end without a major disaster. Plenty of other countries weren't so lucky.

"Usually it's the property developers that are the source of loan defaults and financial instability, not the households with mortgages. But an overstretched household sector is hardly a good environment to have if something should go wrong elsewhere in the economy.

"That is why the Reserve Bank and the Australian Prudential Regulation Authority (APRA) have emphasised loan serviceability so much of late."

She commented that lenders had become more sophisticated in the ways they assess households' capacity to repay mortgage loans.

"Most of them have moved beyond a crude approach of applying a blanket repayment-to-income test, more likely to take people's actual living expenses into account, not just some version of The Henderson Poverty Line. After all, it doesn't seem reasonable to expect people to have a poverty-level lifestyle to pay off a million-dollar home.

"Importantly, lenders are now more likely to apply an add-on to current interest rates when calculating the repayment they use in their serviceability tests. 

"It's fair to say that serviceability calculations are binding for first home buyers and less binding for trade-up buyers and investors. So it's no surprise that as interest rates have fallen, it's the trade-up buyers and investors whose demand has increased.

"Meanwhile first home buyers will feel squeezed out. This is probably more a cyclical phenomenon than a structural one. It is still probably quite disheartening for potential first home buyers.

"As such, it would not be a good outcome if they responded by overstretching themselves to try to get into the market during upswings."

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.

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