What the Banking Royal Commission means for buyers one year on

I’m hearing a lot of confusion from buyers, who are worried that they won’t be able to realise their property goals. The good news is that conditions are getting better, and property is still a great investment.

I spoke to Mark Edlund, CEO of Clarity Financial, who agrees that loan approvals are on their way up. He reported that the second half of the year looked very different from the first, with month after month of record loan approvals. There are several reasons for this. Both consumers and lenders have worked their way through the new lending conditions, so we know how to help buyers get a loan. Add that to ACT’s Stamp Duty removal for first home owners and record low interest rates, and it’s an ideal environment to make your move and purchase property.

The first half of 2019 saw a clamped-down lending environment. Buyers struggled to get loans for either residential or investment properties. Combined with election uncertainty and stagnant wage growth, it caused a significant market slowdown.

To understand why things are looking up again, let’s look at what happened, why, and how the situation has shaken out one year on.

Lender requirements

Lenders of all stripes could see the writing on the wall as soon as the Royal Commission was called. Most of them started tightening their requirements as early as November 2017 in anticipation.

For buyers, this was the change that had the biggest effect. First home buyers and investors alike were met with new hoops to jump through.

Investors

Investors were hit with a double whammy. APRA (the Australian Prudential Regulatory Authority) had already announced a new target for banks in 2017. Interest-only loans, they said, should be limited to no more than 30% of all new mortgages generated. Interest-only loans are of course usually sold to investors, as they have tax advantages for negative gearing.

To comply with the restriction, banks did two things. They tightened their criteria for allowing an interest-only loan, and they raised the interest rate on interest-only loans to make principal-and-interest loans more attractive by comparison. Some lenders went further and discounted negative gearing in their serviceability assessments.

Within six months, interest-only loans fell from 67% to below 40%, but at what cost for investors? Rather than switching to principal-and-interest loans, it appears that they decided to hold off altogether. As lending tightened, housing prices dropped.

First home buyers

First home buyers benefited from lower interest rates than investors. However, they suddenly found their finances under a microscope.

These changes, too, were influenced by APRA guidelines. But if APRA hadn’t moved to change requirements, the Royal Commission would have done. Commissioner Kenneth Hayne was clear that the changes were needed.

Before the Royal Commission, the banks used a standard benchmark known as the Household Expenditure Method, or HEM. The benchmark estimates your living expenses based on variables like household size, income and lifestyle. However, there was concern that this benchmark had a tendency to underestimate real living expenses since it didn’t take into account discretionary spending.

Post-Royal Commission, banks now also ask buyers to assess their living expenses, and not just the basic ones like rent or car insurance. Now, they also look at discretionary spending, including any Netflix subscriptions, eating out and trips to the movies. Buyers used to be able to claim that they’d cut back on indulgences if they got a mortgage. Now, they need to make that lifestyle change beforehand.

Lenders are also turning a sharper eye than ever before on your current debts. Car loans, credit cards and ‘interest free’ terms on white goods all go into the mix. Too many, and the banks will start worrying that buyers are overcommitted and might not meet their mortgage payments.

Today’s lending environment

In the immediate aftermath of the Commission, lenders were arguably overzealous in enforcing the new rules. Today, loan approvals are back up, indicating that lenders and borrowers are working through our new world.

However, there has been a fundamental shift in who is getting those loans. ABS data from July 2019 shows that the value of new lending rose by 3.9%, putting them at levels last seen in October 2014. The difference? In 2014, more money was being lent for investment purposes than owner-occupiers. Today, the rise is largely driven by owner-occupiers.

In fact, thanks to record-low interest rates, generous stamp duty concessions and softer house prices, there’s rarely been a better time to enter the housing market.

If you are an investor, you can take advantage of vacancy rates running well below 1%, low interest rates and new laws that favour new builds. The long-term average returns for property investment are extremely positive, meaning it is now time to put this back on your radar.

While the Banking Royal Commission has seen some changes to lending practice, the fundamentals remain the same. A history of responsible behaviour and the ability to save money will make you an attractive candidate for a home loan.

The Reserve Bank, APRA and banks have all been clear: housing is fundamental to the economic wellbeing of the country. The changes of the past two years, while difficult at the time, have created a safer environment for those wanting to buy in to the Australian dream. Because the one thing that has become clear is that owning property is still at the forefront of our wants, needs and desires. And those who lend to buyers will always spend the time to work through the issues to help buyers realise this dream.