APRA, interest rates and Sydney 2020
The start of 2020 allows for plenty of reflection and predictions about the next 12-months in Sydney real estate. I’ve written previously about how I think the market will track, but I thought it’d also be useful to look in more detail at two primary drivers of performance – finance regulation and interest rates.
Australian Prudential Regulation Authority (APRA)
APRA was established in order to set guidelines that regulate lenders’ activities. That’s to say, they’ll impose rules for financiers that can limit or boost lending activity.
Past examples of APRA intervention include the 2014 ruling that called for banks to reduce growth in their investor loan numbers – a guideline that’s since been revoked as it had, according to the APRA chairman, “Done its job.”
From 2017 to 2019, in response to the Royal Commission into banking, APRA set new rules around various elements, such as interest-only loan numbers and tighter serviceability limits. During these years if you were borrowing more than 80 per cent loan-to-value ratio as an investor, the chances of securing one of a dwindling number of interest-only loans was fairly remote.
In terms of serviceability, APRA was guiding banks to increase the amount of deposit required from borrowers, and to improve their scrutiny of loan applications. As a result, many borrowers who would qualified for lending pre-2017 struggled to secure finance post-2017.
Then in mid-2019, some restrictions were loosened. For example, a ruling that banks must use a seven per cent interest rate basis in assessing serviceability was removed. Instead, the bank could apply a 2.5 per cent premium on the actual loan rate.
What transpired towards the end of 2019 was increased activity in the property sector as buyers found it a little easier to access funds and complete purchases.
So – what’s next??
Well, APRA has been quiet of late with little mention of its intentions in 2020, and we believe this will continue as a ‘wait and see’ approach.
That said, property is this nation’s biggest sector by capitalisation and APRA’s previous interventions severely impacted activity. APRA suggest they’ve achieved many of their short-term goals in slowing the sector, which means they’re unlikely to tighten the rules again anytime soon.
Watching the Reserve Bank’s calls on interest rate movements has become something of a sport for Australians. The RBA’s monthly decision floods social media streams within seconds of going public.
The official cash rate currently sits at 0.75 per cent – a historic low many would have thought near impossible a decade ago. On balance, lenders are generally providing products with interest rates in the three-to-five percent range but sub 3% interest rates are out there.
The prediction of interest rate movements is also something of an Olympic-level event among property professionals and economists. While there’s never a sure thing, if you get enough economists in a room they’ll soon reveal a collective belief about which direction the cash rate will head.
So, what’s been the most recent call?
Well, incredibly, many believe the cash rate will be cut further in 2020 with predictions of two reductions this year as an economy-boosting measure. As such, loans with an interest rate of sub-three per cent could become the norm.
Borrowers across the board – both existing and new – are set to benefit in terms of easier serviceability. Boosted buying power for purchasers will translate into increased activity. I temper this comment with the observation that we’ve been operating in a low-interest rate environment for well over a decade now, and cuts have lost some – but not all – of their immediate impact as a stimulus.
In short, we will see the easing of lending restrictions and interest rate cuts as a boost to Sydney’s market over the coming year.
The end of 2019 saw a rise in demand and a fall in supply that drove growth in Sydney’s residential sector, and this looks set to continue in 2020, but will likely ‘settle down’ as we adjust to the new normal.
Just make sure, if you are looking to buy a property in Sydney in 2020, you’re relying on the advice of an independent buyers’ agent. We are tracking the market on a daily basis so our clients understand the opportunities and are well positioned to take advantage.
If you’re looking for a buyer’s agent in Sydney to help you find a property, get in touch with us today to see how we can help.