Aerial view of Australian suburb.

APRA Looks to the Slow Unprecedented Growth in the Housing Market

A recent meeting of the Council of Financial Regulators (CFR) found members concerned with the unprecedented Australian property prices. While the market slowed a bit, many in the CFR expressed concern about the impact on the overall economy of Australia.

According to the council, the most recent round of lockdowns tapped the breaks on new listings and transactions. However, credit growth continues in major markets across Australia, and commitments to new housing loans remain high. Both indicators will likely remain high, according to the CFR.

The Australian Prudential Regulation Authority (APRA) announced a move intended to slow the rising tide in the housing market. On the fifth of October, APRA instructed lenders to look at new borrowers’ capability to make their loan repayments at an interest rate that is a minimum of three percentage points above the loan product rate. This change bumps the rate from the previous minimum of 2.5 percentage points.

APRA’s macroprudential move did not catch those in the industry by surprise. If anything, there were rumblings that the regulatory authority did not do enough and that another action may be necessary.

The International Monetary Fund (IMF) implored Australian banks to take a conservative approach to their lending practices. The IMF also issued a warning that the rising levels of personal debt and debts accumulated by households may strain Australia’s economy.


How Does This Impact Financial Stability?

According to Assistant Governor (Financial System) Michele Bullock, it is not simply property prices themselves that are the concern. Rather, it is how the developments in the housing markets signal potential financial stability risks.

When we look at the potential for economic peril down the road, it is essential to pay attention to two interrelated entities, Australian banks and Australian households.


Australian Banks

  • The housing market amounts to approximately 60 per cent of the banks’ lending
  • Homes are used as collateral for a large portion of small and medium-sized loans
  • If borrowers could not repay their loans while housing prices were in a state of decline, banks could not recoup their losses. They would have to sell the foreclosed property at a reduced rate.
  • Multiply one such loss by the scores of new home loans. One can see how the solvency of Australia’s banks could easily be put in jeopardy.


Australian Households

  • The most considerable portion of Australian household debt is mortgage debt
  • Prices of Australian homes rose 17.6 per cent during the first nine months of 2021.
  • The average increase in wages during the same time was 1.7 per cent
  • Households are over-extending in a rush to take advantage of the reduced interest rates, despite the growing home prices
  • One out of every five new home loans gets approval at levels that are six times the borrower’s income
  • If home values drop and the over-extended borrowers are not able to service their loans, selling their home at less than they owe could spell disaster for Australians

The reaction to economic changes is generally predictable. By watching trends in consumer behaviour and investor activity, forecasts in spending and prices are accurate.

  • Consumer Behaviour

How consumers react to changes may be a wild card. However, it is certain that if faced with the prospect of losing their home or curbing their lifestyle, a significant number would trim their discretionary spending. Cutting back on spending will harm the economy.

  • Investor Activity

Monitoring the activity of investors is necessary because of the weight they bring to the market. A rush of activity in buying or selling tends to amplify the movements in housing prices. If investors create too great of a housing price, Australian households will curtail their spending out of necessity.

Suburban neighborhood.


Has the Housing Situation Caused Other Concerns?

A significant cause for concern is the Australian housing crisis that is made worse by the rising prices of homes. Here are some telling statistics that shed light on just how difficult housing is for some Australians to find.

  • Recent reports showed that the median price for a home in Sydney is between 1.3 and 1.4 million.
  • The average amount of money needed to secure a mortgage is $107,000. That is a very high bar for many to reach, especially single parents.
  • One out of every three houses in Australia is an investment property.
  • Australia is the third least affordable housing market on the globe.
  • A mere 45 per cent of those under 35 own a home.
  • One out of nine Australian households pay more for housing than they can afford. This means that difficult choices are made regularly, reducing consumer spending on other goods and services.
  • One in three Australians are renters.
  • Western Australia had 113 per cent more in new loans from the same time last year

Case Study

Lauren and her husband Jay have been renters for their two and a half years of marriage. For the past 18 months, they have been saving for a down payment for their first home.

Neither Lauren nor Jay like the uncertainty of their life as renters. As housing prices rise, rents also increase. The couple has a six-month lease, and renewal is at the manager’s discretion. This makes putting down roots and feeling at home difficult as they know eviction could come for no reason whatsoever.

The couple thought they had enough saved for a down payment, but weekend after weekend, their visits to house auctions and properties that are on the market prove futile. The couple is consistently outbid by other buyers with home equity from previous homeownership. Their search area keeps getting further away from the city where they work, and soon the commute distance from where they would live to their jobs in the city could become unmanageable.

Lauren and Jay are both professionals and imagined that buying their first home would be much easier because of their income. The couple is close to giving up on their search because of the frustration of the present situation.


Three Ways the Australian Government Could Help Fix the Housing Crisis

Recent instructions from APRA are one way to help defuse the housing situation. The new decision tells lenders to scrutinize new borrowers’ capability to make their loan repayments at an interest rate that is a minimum of three percentage points above the loan product rate.

However, some Australians believe more can and should be done by the government to assist average Aussies who face significant struggles with housing.

  1. Offer support for those entering the housing market
  2. Provide help to those who experience difficulties making their rent payments
  3. Reward those creating affordable housing

Watching financial activity and gauging responses to various stimuli are not enough to tell us the direction the economy may head. And opinions regarding intervention differ widely. The certainty of this situation is that the price spiral and historic low-interest rates cannot last indefinitely.

In times of uncertainty, you need financial professionals with the experience to help you sort out your money matters and look after your plans for the future. You need Quantum Finance. Our financial experts will listen to your goals and dreams and look for the best ways to achieve them. Economists are suggesting we all need to prepare for a bumpy ride. There is no better way to feel confident about your economic future than by working with skilled professionals who have a wealth of experience to share.

Quantum Finance

*Please Note*

The material compiled here is meant for informational use only. It is not intended to replace a one-on-one consultation with a financial professional. It is not to be considered legally binding financial advice and is not guaranteed.

Enquire With Us Today

    Enquire form

    As leading mortgage brokers Perth residents can trust, we'll source the best loan for your individual needs.


    ** Comparison rates are based on a loan of $150,000 over a term of 25 years. WARNING this comparison rate applies only to the example given. Different amounts and terms will result in different comparison rates. Costs such as economic cost and cost savings such as fee waivers are not included in the comparison rate but may influence the cost of the loan.

    * Please note not all loan types are suitable for all applicants and the above rate is for general advertising purposes only. Please check the applicable rates are still valid with a Quantum Finance broker. Your full financial situation will need to be reviewed prior to acceptance of any offer or product