Recent signs that can give borrowers confidence interest rates will remain at record lows will boost investment in commercial property but won’t be enough to kick-start the residential market, industry experts say.
After hiking interest rates seven times across 2017 and 2018, the US central bank last week abandoned plans to push rates higher in 2019, keeping them at 2.25 to 2.5 per cent. The change in sentiment and pause on US interest rates will make it harder for the RBA to lift rates in Australia.
While the availability of cheap money in most scenarios would boost a lacklustre property market, there are other hurdles preventing an immediate turnaround.
“Lower interest rates from the Reserve Bank will be fruitless unless the assessment lending rate is reduced by APRA,” Property Investment Professionals of Australia chair Ben Kingsley said.
In 2014, APRA announced that as well as an interest rate buffer of at least 2 per cent more than the actual interest rate of a loan, banks had to assess a borrower’s ability to repay a loan based on a minimum mortgage rate of 7 per cent.
“[The current market] has everything to do with the regulator, not demand – It has been manufactured first with a cap on interest-only lending, but most importantly what really took demand completely out of the market was their strict interpretation of assessment lending rates and leaving them at 7 per cent. That’s killed borrowing power,” Mr Kingsley said.
Mr Kingsley argued that with a low interest rate environment expected for the next decade, dropping the serviceability rate to 6.5 per cent would be a fair measure without creating systemic risk.
However APRA in its January review of prudential measures targeting mortgage lending risks maintained the 7 per cent floor rate was introduced “to permanently strengthen lending standards”.
“These buffers help ensure that borrowers are able to service their loan even if interest-rates were to rise to more historically normal levels.”
“Credit is the lifeblood of the Australian economy.”
Mark Steinert, Stockland CEO
While an interest rate cut would have a positive effect on consumer sentiment, Stockland chief executive Mark Steinert said it was the availability of credit and the loan approval process that remained the most critical factors.
“With reducing vacancy rates and slower building activity over the coming year, with not enough houses being built to meet underlying demand, credit availability and buyer confidence will play an important role in driving necessary supply in the housing market to avoid undue rental and price pressure,” Mr Steinert said.
“Credit is the lifeblood of the Australian economy, and policymakers and financial institutions must ensure responsible access to credit for first home buyers, owner occupiers and investors – who contribute to the supply of rental properties – to help ensure the resilience of our housing market.”
Economists are increasingly expecting the next move by the RBA to be a rate cut, after rates have remained on hold at a record low of 1.5 per cent since August 2016, but Steve Mickenbecker, group executive, financial services at Canstar agreed it would not be enough to suddenly quash the pervasive negative sentiment in the market.
“Demand is off. Capital outflow restrictions for Chinese really hurt the market a lot and once the expectation was for prices to go down, investors start deserting the market. So why would you buy this year when in a year you think you can buy for 10 or 15 per cent less?”
Low rates are no incentive
“Interest rates are at historic lows and the RBA won’t want to move below 0.5 per cent this year – so a point 0.5 per cent decrease isn’t enough to drive demand,” Mr Mickenbecker said.
According to Mr Mickenbecker, there are currently about 1000 loans on the comparison website with a rate below 4 per cent.
“It just goes to show how cheap loans are right now. Low interest rates are no incentive at the moment,” he said.
Adam Murchie, director at property fund manager Forza Capital, said it was investors of commercial property not residential who would be the real winners of a low interest rate environment.
“Arguably it’s going to give commercial assets another shot of adrenaline, because people can afford to pay more for the same profit margins,” Mr Murchie said.
“The commercial property market has already been pretty bullish for a while, but at the back end of last year, with the bank margins increasing and 3 and 5-year bond rates increasing, that was going to start to put pressure on asset pricing,” he said.
“But since then it’s gone the other way … they are almost in free fall, so it’s saving investors that are drawing debt at the moment probably 50 basis points off their interest costs.”
Ingrid Fuary-Wagner and Michael Bleby, Australian Financial Review, Page 32, 26 March 2019
Ingrid Fuary-Wagner and Michael Bleby, Australian Financial Review, 26 March 2019