How to increase mortgage rates without increasing them? | Greg Jericho


TThose lucky enough to be able to afford a home loan will now have to prove that they can pay 3% more than the interest rate offered by the bank. This is a new measure ironically introduced not to ensure that people will be able to pay when fares go up, but because fares aren’t about to go up at all.

What happens when the spot rate is 0.1% and the average mortgage rate of 3.03% is much lower than anything seen in the past 60 years?

As we all know, house prices are skyrocketing.

This surge means that we are on the verge of breaking the record for the level of housing debt relative to income:

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This is not something sustainable given our weak economy, but if you are the Reserve Bank, you do not want to raise interest rates to stop the price rise, as that will also raise mortgage rates for loans. companies and it would hurt the same weak economy. .

How do we know the economy is weak? Well, for a start the cash rate is 0.1% and the government just ran a deficit of $ 134 billion and is expected to generate another of around $ 100 billion this year.

This only happens when things are not going well. Despite all of these massive stimulus measures, wages are still barely rising to 2% and the RBA does not expect inflation to exceed 2.5% until at least 2023.

And yet house prices are skyrocketing.

So what to do?

The answer is macroprudential tools.

These are measures by which central banks and regulators attempt to tighten monetary policy without raising interest rates.

Often, they are introduced because of concerns about the instability of the financial system.

For example, the first macroprudential tool introduced in Australia was the Australian Prudential Regulation Authority (Apra) telling banks in 2014 that annual growth in investor credit exceeding 10% would be considered a “significant risk indicator” (i.e. that is, this must not happen).

But for the moment, credit growth is far from 10%:

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The concern now is housing prices. They fly away and yet the RBA cannot raise its rates for fear of giving the rest of the economy a boost.

Instead, what Apra did was announce that banks need to make sure borrowers are able to afford a home loan if interest rates rise 3% rather than than the previous “buffer” of 2.5%.

In fact, it raises interest rates without doing so.

Right now, the average homeowner’s mortgage rate paid is 3.03% (and if you’re paying more than that, call your bank and ask for a rate cut):

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If you live in New South Wales, that means for a 25-year loan on an average mortgage of $ 750,784, your monthly payments are $ 3,573.

In the past, however, banks would have verified that you had the capacity to pay $ 4,624 per month – because that’s the 5.53% (3.03 + 2.5) payback. Now the banks will check if you can pay $ 4,852 – 6.06% loan repayments:

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But there is actually very little chance that you will have to pay this amount.

For rates to rise by 3%, it would take a massive economic boom. Consider that during the mining boom of the early 2000s, it took six years for average mortgage rates to drop from 6.07% to 9.34%.

We’re not about to have such a boom anytime soon.

The RBA and Apra are therefore not worried that people will soon be unable to repay their loans.

But it also means the RBA (and homebuyers) know that rates won’t go up for a long time, and probably not by much even then. And this situation is ripe for a spike in house prices.

These measures therefore effectively reduce the number of people who can be approved for a loan. Because, as we know, the weaker the growth in mortgage loans, the weaker the growth in house prices.

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And so if, for example, you live in Victoria, you’ll be asked if you can afford an extra $ 1,060 per month for a 25-year loan, rather than $ 872 as was the case with a buffer of 2, 5%:

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Given that it’s only an additional $ 188 per month, it’s clear the RBA and Apra don’t want to stop borrowing massively, but just temper it.

But those higher buffers also suggest that the RBA isn’t about to hike rates – because you’re only using macroprudential tools when the other tool for raising interest rates needs to stay on the bank. tray.


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