Potential Rate Cut Meaningless Without Regulatory Change

A recent article in the Australian Financial Review quotes JP Morgan as predicting the official cash rate to fall to 0.5% inside the next 12 months. Financial markets are already pricing in a 25 basis point reduction on Tuesday, and two more of the same prior to Christmas.

While this might be good news for mortgage holders, rate cuts alone will not provide the predicted boost to housing activity many are forecasting.  Those who already hold a mortgage will enjoy the reduced payment requirements, however the reduced rate arguably will do nothing to help those looking to secure debt to enter the housing market due to a lack of access to that debt. In recent weeks APRA have forecast some mortgage serviceability changes, but until those changes come through – a rate cut is unlikely to have any influence on housing activity.  Under current regulatory requirements, buyers have their repayment serviceability tested against a rate of 7%. This test will not change if rates are cut, as the guidelines no longer operate on a margin against the cash or bank variable rate, but a set benchmark of 7%.

So while a potential buyer may now have greater spending power with potential new cash rate, this will not be realised as their debt serviceability measure will not change.  As such, a rate cut will not enhance a buyer’s access to debt and will likely have no impact on housing activity in the short to medium term. The most likely driver of activity in the short term is a sharp change in consumer sentiment on the back of the unexpected election result. There is more certainty surrounding a range of taxation issues whether related directly to property or not, and agents in all major cities are reporting enhanced activity from both buyers and vendors alike.

In a subsequent article in the Australian Financial Review – Treasurer Josh Frydenberg was quoted as saying that major banks have an ‘economic and social responsibility’ to lend. Mr Frydenberg, who met APRA Chairman Wayne Byres on the post-election Wednesday, backed the proposal to remove the 7 per cent serviceability buffer on home loans, describing it as a “positive development that will continue to spur lending growth across the economy”.

The Treasurer also said banks have an “economic and social responsibility” to continue to lend to support households and businesses, saying clarity after the election result and the end of the Hayne royal commission should restore lenders’ confidence. This comes amid widespread lender concerns that responsible lending obligations and “micro-prudential” regulation by APRA in the form of the serviceability rules are restricting credit growth.  APRA’s proposal to remove the floor “is a positive move, it has been well received, and I think you will see continued credit to flow”, the Treasurer said after an address to a stockbrokers conference in Sydney.

Just don’t expect any growth or tangible increased activity until this proposed change gets through.  Anecdotal evidence suggests sentiment changes, but sentiment will not convert to activity until the removal of the rate floor is finalised.