Lending & Property Update – October 2021

October 2021 is shaping up to be a very much compliance-oriented month, with two important pieces of royal commission driven legislation taking effect, and the Australian Prudential Regulation Authority (APRA) announcing new measures designed to cool the extensive capital growth seen across all sectors of the property market.

Design and Distribution Obligations (DDO) was launched on the 5th of October with financial product issuers now obliged to determine an appropriate target market for their financial products, and take steps to ensure that those being sold their products fit within these guidelines. From a credit perspective, mortgage brokers have been bound to new Best Interest Duty obligations since the 1st of January so it would seem that whilst there are now additional obligations from a home loan processing viewpoint, the client should still be receiving a product aligned to their goals and objectives as per previously introduced regulations.

Newly-minted breach disclosure legislation has increased the number of reportable situations that credit licensees are required to disclose to the Australian Securities & Investments Commission (ASIC). Significant breaches of core obligations are now required to be disclosed to ASIC in a much shorter timeframe in an attempt to stop licensees from addressing and remediating issues in-house. Given the even increasing compliance demands of operating a credit licence, the benefit of a small operation attempting to run a credit licence is reducing.

Spurned on by widespread media reports of the ever-increase unaffordability of housing in major cities around Australia, APRA has stepped in with a very gentle direction for lenders to increase their assessment/sensitisation rate up to a minimum of 2.5% points. Many lenders currently are currently using a buffer of around 2.25% so this will result in a reduction of borrowing capacity for some borrowers. Given that interest rates are at an all-time low, and buffer rates are added to the client’s actual rate, many banks are already completing their assessment using a floor rate so this will not impact all clients. Those with significant investment lending, and those borrowers approaching their maximum credit limit will likely not be able to borrow as much as expected. APRA has left the door open to implement more measures in the future such as limiting high debt-to-income ratios. It is unlikely that this assessment rate change alone will have a material impact on ever-increasing house prices.

In the property market, dwelling prices increased 1.5% in September. This is a slight moderation on the growth seen in previous months, however still well above the decade average of 0.4%. On a yearly basis from September to September, growth is sitting at a 20% increase – the most since 1989. Anecdotally, there is an expected decrease in growth towards the end of the year as lockdowns end and the market returns to a level of normality. The Reserve Bank of Australia (RBA) and other regulatory bodies alike hope that the market will cool slightly to allow wages and the cost of living to catch-up.