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Turbocharge WealthThe Coalition’s election promise to relax lending rules could have significant implications for the housing market, potentially leading to larger home loans and increased house prices. Currently, banks are required to apply a 3 per cent serviceability buffer when assessing borrowers’ capacity, ensuring they can afford repayments both now and in the future without facing financial hardship.
APRA, the Australian Prudential Regulation Authority, enforces rules for banks and credit unions to safeguard the financial system and depositors’ funds. One such rule is the interest rate buffer, currently set at 3 percentage points. This buffer ensures that borrowers can still afford repayments if interest rates rise, considering the long duration of most mortgages.
The Coalition aims to lower this buffer, arguing that the current rate is too high, especially as interest rates are expected to decrease. Shadow Housing Minister Michael Sukkar highlighted that the buffer disproportionately affects first home buyers, hindering their entry into the market due to limited savings and equity.
While reducing the buffer could enable borrowers to access larger loans, it may also lead to a surge in property prices, benefiting existing homeowners and investors. However, this move could further exacerbate housing affordability issues, as increased borrowing capacity could drive up prices, making it harder for many prospective buyers to enter the market.
Historically, changes in lending rules have had significant impacts on the housing market. Stricter rules imposed by APRA led to a downturn in property prices between 2017 and 2019. Conversely, easing regulations and falling interest rates resulted in a rapid increase in prices, demonstrating the influence of lending policies on market dynamics.
Experts suggest that while lowering the buffer may provide short-term benefits, reintroducing a floor on the test rate could mitigate risks associated with excessive borrowing. By setting a minimum interest rate for affordability assessments, borrowers would be protected against potential future rate drops, preventing unsustainable credit booms and property price inflation.
While the Coalition’s proposed policy could enhance borrowing capacity for some buyers, it may not address underlying affordability challenges. Without corresponding increases in housing supply, any demand-side interventions are likely to drive up prices, limiting access for many aspiring homeowners.
In conclusion, the debate over relaxing lending rules underscores the complex interplay between financial regulations, market dynamics, and housing affordability. As policymakers navigate these issues, balancing the needs of borrowers, homeowners, and the broader economy remains a critical challenge in shaping the future of Australia’s property market.
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