Mortgage stress test buffer of 2.5 per cent is here for a while despite price rises, experts say

Housing prices in Sydney and Melbourne are set to keep pushing higher into next year with the bank regulator unlikely to intervene again for some time to make it any harder to borrow money, according to experts.

Despite the strongest quarterly price rebound since the 1990s for both cities, potential home owners are more likely to see another interest rate cut before a regulatory move to slow the market.

Forecasts have been upgraded with the two major cities tipped to rise as much as 15 per cent in 2020 after housing sentiment picked up sharply in the past few months.

The remarkable turnaround came as the federal election result locked in favourable housing tax policies and the Reserve Bank cut the cash rate three times. Bank regulator APRA meanwhile slashed its stress test from checking borrowers could repay at least a 7 per cent interest rate to just a 2.5 per cent buffer above an applicant’s home loan rate, a move that added tens of thousands of dollars to potential loan sizes. 

Sydney led the rebound with house prices regaining almost one-third of the value lost during the two-year downturn, jumping 4.8 per cent to a median $1,079,491 in the September quarter, on Domain figures.

Melbourne recorded its fastest recovery, regaining more than half of what was lost in the recent downturn with the city’s median house price up 4.1 per cent to $855,428.

In the past, APRA had moved to stabilise soaring dwelling prices, restricting the flow of interest-only loans in 2017 when the market was white-hot and limiting growth in lending to investors in 2014.

Forecasts for capital city housing prices are being upgraded as the market strengthens, with SQM Research last week predicting Sydney dwelling prices to rise between 10 and 14 per cent over 2020 and Melbourne to add 11 to 15 per cent. 

Canberra was tipped to lift 3 to 7 per cent, Brisbane 3 to 6 per cent and Perth 3 to 6 per cent. 

The projection assumes APRA does not intervene in the market again until at least late 2020.

“Recent comments by APRA are basically along the lines that they actually welcomed the price rises in Sydney and Melbourne this year because that will actually stabilise the risks to the economy,” SQM founder and managing director Louis Christopher said.

“Going forward, they are just going to be monitoring credit growth.” 

Commonwealth Bank also lifted its house price forecasts, tipping 7 per cent growth for Sydney in 2020 and 8 per cent in Melbourne, with more modest rises of 4 per cent for Brisbane, 4 per cent in Canberra and 2.5 per cent in Perth. 

NAB economist Alan Oster said it was unlikely credit would become harder to access.

“There’s no credit growth at the moment. You’d need a very strong pick up in prices,” Mr Oster said. “You can’t just raise it for just Sydney and Melbourne; you have to do it across Australia. It’s not going to happen in the next 12 months.”

EY Oceania chief economist Jo Masters said the 7 per cent serviceability floor was set at a time when mortgage interest rates were relatively higher.

“[The stress-test] is not the major driver of how much you can borrow, it’s expenses and income,” Ms Masters said. “It has a big sentiment impact, and alongside the election and rate cuts, it turned sentiment in the market.”

“We do not hear any real concern from the RBA about the rising house prices … I’m not getting any sense people are concerned.”

Ms Masters said as volumes pick up it’s unclear how the rate of growth would be sustained into 2020.

AMP Capital chief economist Dr Shane Oliver said higher house prices alone would not be enough to raise the stress-test.

“It will require a combination of things. Price gains is one of them, but bank credit growth remains low,” Dr Oliver said. “If that credit grows than that would be something that would bring APRA back into the picture.”

He said a sharp rebound in interest-only lending, investor loans and the deterioration of loan-to-value ratios would be other factors needed to increase the mortgage repayment buffer.

But there is a chance that could happen, he said. 

“If we continue at that rate [of house price growth], we’ll be at all-time highs by the middle of next year, and if they haven’t shown any signs of slowing down, then that is a major concern.”

with Elizabeth Redman