Why refinancing is in focus now
Australian lenders are competing for refinancers at a time when parts of the housing market are under pressure. The current downturn sits in sharp contrast with the late 1980s boom. Today, new borrowers can access mortgage rates below 4%, unemployment sits at 5% and has trended down over recent years, and the latest official data released this week points to economic growth above the 3.3% average.
Despite those near-boom conditions, prices in southeast capital cities are falling fast, and Perth’s market has been declining without any sign of stopping.
What made lending standards tighten
The 1980s boom was accompanied by serious breaches of mortgage standards. Potential borrowers were also assessed at higher mortgage rates, which reduced how much they could borrow.
That pattern has a parallel with today. Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Royal Commission pushed banks toward more responsible lending rather than forcing people into default at high rates the way the Reserve Bank of Australia did in the late 1980s.
Where house prices may be heading
If the current downturn is mainly the result of lending standards tightened this year, those standards are now in place and are unlikely to tighten further, which suggests prices should be close to the bottom. Reserve Bank of Australia Governor Philip Lowe warned in a recent speech that Australia needs banks to be prepared to lend, and that some borrowers are expected to be unable to repay their loans. He also said that if banks are afraid to lend purely because they fear the consequences of loan defaults, the Australian economy will suffer.
FAQ
Why can new borrowers get mortgage rates below 4% while prices are falling?
New borrowers can obtain mortgage rates below 4%, while southeast capital city prices are falling fast and Perth’s market continues to decline. The low rates sit alongside the price falls rather than reflecting them.
What happened to lending standards after the 1980s property crash?
APRA, ASIC and the Royal Commission pushed banks to lend more responsibly, rather than forcing borrowers into default at high rates as the Reserve Bank of Australia did in the late 1980s.
Were potential borrowers assessed at higher mortgage rates?
Yes. Potential borrowers were assessed at higher mortgage rates, which meant their borrowing capacity was reduced.