New change by Australia's financial regulator could make housing more affordable

We might have finally seen a change that will help make housing more affordable.

Sure, there have been plenty of announcements on housing affordability. Politicians like nothing more than announcing a new policy, regardless of whether it will actually work.

But this change didn’t come from the politicians. Rather it came from the financial regulator.

The financial regulator has just announced that it is going to start restricting lending that mainly goes to property investors. I wrote about this recently when there was first talk that something like this might happen.

APRA, the financial regulator, is worried about risky borrowing and today announced that no more than 20% of new lending can go to borrowers with debt-to-income ratios of greater than six times. So, if your household income was $150,000 a year you could face restrictions if you wanted to borrow more than $900,000.

The regulator is worried about what risky lending might mean for the whole financial system if we have downturn.

But why will this mainly impact investors and more importantly, why might it make housing more affordable?

Investors are far more likely to have high debt-to-income ratios. Most investors are already wealthy and can put up substantial amounts of collateral. This means banks are willing to offer them larger mortgages.

Put simply, banks are more willing to lend to people buying their fifth house than their first.

This change will make housing more affordable because the insane house prices that we are seeing are primarily driven by investor demand for housing. If investors find it harder to get mortgages, that means that less investors are going to buy, making room for first home buyers to get a place of their own.

This is what happened the last time APRA restricted investor credit. Back in 2015 they were worried about financial stability. Their restrictions increased interest rates on investor mortgages and there was a big drop in investor credit.

House prices also fell 10%. The biggest drop in the last 25 years.

But before we all get too excited, it is important to note that the restrictions that APRA announced are very weak. Restricting debt to six times income for 20% of new mortgages is not much of a restriction, since it’s only 7% at the moment.

As the data above shows, on the back of three interest rate cuts, investors have recently started rushing back in. These new APRA rules could put up important guardrails on lending.

All of this highlights that the Government could do much more. As we have suggested previously, they could tell APRA to consider housing affordability when it is setting its lending rules.

This would allow APRA to go harder, forcing up interest rates on investor mortgages, just as the did a decade ago. And then, just as happened a decade ago, house prices would slow, and first homeowners would win more auctions.

But the best reform the Government could make is to stop the problem at its source. Scrap the capital gains tax discount and restrict negative gearing. These are the massive tax concessions, worth $13 billion a year, that are attracting investors into the housing market, like moths to a flame.

Cut those tax concessions off and you push many of those property speculators out. This would be a huge step towards affordable housing.