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More brokers have added their voices to a chorus of finance industry representatives who have called for the Australian Prudential Regulation Authority (APRA) to show more flexibility when it comes to the current 3% serviceability buffer.
APRA confirmed last week that, despite some industry participants arguing for serviceability buffer relief at a recent Senate Inquiry, it would continue to lock in the 3% serviceability buffer for now.
The regulator said it considered high household indebtedness, a pick-up in credit growth, persistent cost-of-living pressures, a weakening jobs market and heightened geopolitical risks in its decision.
“Since APRA’s last announcement regarding its macroprudential policy settings in July, inflation has continued to moderate and the risk of higher interest rates has receded somewhat,” APRA chair John Lonsdale said.
“But we are mindful of potential shocks to household incomes from a slowing labour market. That risk is exacerbated by uncertainty in the global economic environment including geopolitical instability,” he said.
However, brokers say the regulator could have considered being more flexible on the serviceability buffer rate, such as adjusting it based on market conditions and cash interest rate expectations.
“I think in a falling [interest rate] climate, like we are about to be in, it could be lessened for a period,” PFS Financial Services founder Daniel O’Brien (pictured, top right) told Australian Broker.
O’Brien said it was “no great secret that rates are not going to go up for a while”, and a reduction from a 3% to a 2% buffer rate in a falling rate environment would not “trigger financial meltdown”.
“Upon such time in the interest rate cycle where [interest rate] increases are on the horizon, then by all means increase the buffer again if needed,” he said.
Home Loan Experts senior broker Jonathan Preston (pictured, top centre) said the decision to remain firm on a 3% buffer rate was essentially a decision from APRA to throw “Aussie families under the bus”.
“By keeping the buffer at this level, APRA is keeping first home buyers crippled and unable to buy across most of the country,” he said.
“The government’s high spending has left the RBA unable to cut rates rapidly. So without APRA assistance, Australians remain locked out of homeownership on a wide scale.”
Preston said the situation was creating a “perfect storm” for borrowers, where government intervention was propping up rates and APRA was maintaining a large serviceability buffer.
“This is hampering the ability of everyday Australians to simply get off the rental hamster wheel and get into the property market,” he said.
Lonsdale said that, despite the 3% serviceability buffer and other macroprudential settings, “credit continues to flow to households and businesses and is accessible to good quality borrowers”.
“Although house price growth has eased, prices are still 40% higher than before the pandemic and household debt is high relative to incomes both compared with long-term trends and relative to international peers,” he said.
“This high household debt is a key vulnerability if adverse economic scenarios came to pass. We also have seen an uptick in non-performing loans, with the potential for further rises, especially if unemployment increases.”
However, Home Loan Experts broker Sid Bajracharya (pictured, top left) said APRA’s decision ran counter to other government efforts to support borrowers, such as the Family Home Guarantee Scheme.
He said while the policy aims to help single parents get into a home, many of them are also impacted by the decision to hold the buffer rate at 3%, because it “cripples their buying power”.
“This policy forces many Aussies to rent instead of owning a property, which makes them miss out on building equity,” he explained.
“With living expenses and rent both high, they are struggling. But if the buffer rate were decreased to a certain acceptable level, at least they could get a mortgage and receive equity as a return on their repayments, whereas they receive no return on paying rent.”
While O’Brien said he was seeing the 3% buffer create hurdles for some, he said there have also been “game-changing” policy niches come out in the last two years to counteract the issue.
“Overall, I’m not seeing it be a massive problem for educated and capable brokers. There are numerous solutions now that didn’t exist three years ago,” he said.
Home Loan Experts’ Steven Chan commented that the 3% buffer will continue to moderate growth and disproportionately affect first home buyers. He said investors will not be impacted much.
“Investors have more options to side-step the buffer,” Chan said. “Also, investors are getting higher yields than ever and many of them bought pre-Covid, so this doesn’t affect them as much.”
O’Brien said APRA should consider a lower buffer for sophisticated property investors.
He said this could be for investors who own 5-10+ properties, have a net asset position of $5-10 million+, or are applying for a loan below 60-70% of a property value.
“Then maybe the buffer should be 1%,” he said. “As they have numerous exit strategies to extinguish the debt, plus they have clearly demonstrated they know what they are doing.”
APRA said it would maintain its settings, but will continue to closely monitor the external operating environment and “will consider modifying these settings should that become appropriate”.
