Hey guys, so if you’ve been saving to buy a house in the last say 6 months or so, then
the interest that you would generated from your deposit would have made around $2000
or so.
So something like this is your deposit, and here's two thousand dollars.
But you then had your house deposit in the stock market, you would have made around $20,000.
$20,000 something like that.
But if you were a home owner in the last 6 months or so, then you would have increased
your net worth around $180,000.
So, $180,000...
Wow.
Australian house prices have just really gone insane in the last few months and I think
it's really about time that we start to restrict lending.
That’s kinda what guys like the Treasurer Josh Frydenburg and Commbank CEO Matt Comyn
are saying.
So what does this mean for you and how does it affect you?
Let’s dive in and find out.
So house prices here in Australia have pretty much gone absolutely haywire.
And this time, it's completely different from the last boom back in 2016 which was largely
driven by investors.
So this time, it's actually the first home buyers that are competing against other first
home buyers and they're pretty much all backed by the bank of mum and dad.
Now the low supply of houses is kind of making the issue worse because every buyer that fails
to win an auction is more determined and more mentally prepared to pay more the next time
they go to bid.
And this is all happening now because its coupled with the lowest ever interest rates
that we have ever had right now and that's essentially rocket fuel for house prices.
Now low interest rates means two things, the first is that repayments are lower for existing
mortgage holders, so that's really good for the economy because it means that owners have
more disposable income to spend.
That's something that we call the Wealth Effect.
And the second point is that greater borrowing power for people looking to get a mortgage.
Now this second point is the important one because it's raising a lot of questions about
how sustainable this growth is.
Questions like “How is it possible to borrow so much money when there's such little wage
growth happening”.
This is a really valid question and because it’s actually a ratio that is constantly
being monitored and that's called the debt to income ratio.
So that’s the value of your mortgage divided by your income.
Now traditionally, the debt to income ratio is around 4x for around 40% of the mortgage
holders, and its about between 4 to 6x for another 40% of mortgage holders, and then
we have the mortgage holders that's over 6x the debt to income ratio are usually in the
teens percent.
So if you earn around $100,000 a year, then your mortgage would be more than $600,000
to be in this group.
This is the most risky group of the lot but thankfully this hasn’t really changed much
until very recently when the mortgage holders with more than 6x the debt to income ratio
has crossed this 20% threshold.
Now this might not seem like much but even a small shift in this ratio puts an exponentially
larger percentage of people at risk of defaulting on their loan.
And when that happens, well let’s just say we don’t want to repeat what happened to
world finance back in 2008.
So it’s actually so risky now that even Commbank CEO Matt Comyn is willingly raising
the serviceability rate to try and stop borrowers from overextending themselves.
Now Matt Comyn is someone who makes money lending money to people, and even he is so
concerned about people defaulting that he’s happy to limit the loan books to try and put
some brakes on house prices.
Even National Treasurer Josh Frydenburg is also concerned enough to give his backing
to regulators to implement measures to slow prices growth in the future as well.
Now that’s just all talk but at least the conversation on how to slow it down has actually
started.
Actually the body that’s responsible for this is the APRA, or the Australian Prudential
Regulation Authority and they have power over the banking industry, and on the 6th of October
wrote a letter to banks telling them to officially raise their minimum interest rate buffer from
2.5 percent to 3 percent.
The interest rate buffer is a test that the banks apply to see if you can still afford
the mortgage if interest rates suddenly went up by 3 percent.
So your interest rate might be say 2 percent, but to get approved for the loan, you need
to have enough income to support 5 percent.
So increasing this buffer should make it harder to get a loan and should decrease the number
of loans getting approved.
But if we actually look at the numbers, that’s an increase of 20% to the interest rate buffer,
and reduces the maximum borrowing capacity of borrowers by about 5%.
Now here’s my take on all of this.
When you look at how much house prices here in Australia has grown in the past year, I
think that 5% is going to do very little to slow down house price growth.
Especially in the next year or two when our international borders open up and the population
tap gets turned on again.
Even now without all the students and migrants that are coming in from overseas, the rental
yields on houses and units have gone up for the first time in the last couple of years.
Couple that with the fact that the RBA has pretty consistently said that interest rates
won’t move until at least 2024, then we’ll have the two main factors that actually drive
prices in perfect sync with each other.
And that's going to be Population growth and low interest rates.
Check out these 2 graphs of the exact 2 factors combining to create the perfect conditions
for a housing boom.
Now I can actually draw a line of best fit on this graph to create an average growth
rate.
If the line goes above my line of best fit, it's probably due for a correction.
This is exactly what happened in 2017 when the APRA stepped in to limit interest-only
loans to investors, and the market reacted with a bit of slump.
So all of this really just cements the strength of investing in bricks and mortar, and even
returns on the ASX stock market have struggled to keep up.
While there’s always going to be a lot of attention on Australian house price growth,
the fact is, housing is always going to be limited and our population is still very low
when we compare it to other developed nations.
But I think as we slowly start to emerge from our lockdowns, we are going to be heading
towards another federal election and the market will definitely be waiting to see who the
victor will be, and deciding if the boom will continue for the next few years or not.
So definitely watch this space.
Anyway that’s it from me on the new mortgage restrictions, if this was informative to you,
be sure to hit that like button as always and subscribe to the channel as well to keep
up to date with the housing and stock market here in Australia.
I’m the healthy investor, and as always thanks for watching.