While The Australian Prudential Regulation Authority’s (APRA) relaxation of the interest rate floor will provide a modest easing, it is only small compared with the range of other measures that have been tightened in recent years and which, in some banks, will be ongoing.
Consider the banks' increased focus on debt-to-income ratios across their mortgage portfolios. For some borrowers that will constrain the increase in their maximum borrowing limits to be no greater than the growth in their expense-adjusted income.
It has simply become more difficult for house prices to rise more quickly than income for sustained periods. And income growth itself is, of course, only modest anyway.
There are also two important top-down constraints likely to operate over the medium term.
The first is leverage. Many are treating the slowdown in housing credit growth to a four-decade low of 3.8 per cent as temporary.
But the rate of household income growth is still very modest at about 3 per cent. Tax cuts will see that pick up closer to 4 per cent over the second half of the year. But in order to stabilise the household debt to income ratio over the medium term, barring a surprising pick-up in household income, credit growth can’t grow more quickly than it is at present.
The second is affordability. The recently released ANZ-CoreLogic Housing Affordability report shows various measures of housing affordability have improved over the past year or so. But the improvement in purchase affordability has been only modest and unevenly spread.
On a dwelling price to income basis, for instance, affordability in Canberra and Tasmania has continued to deteriorate, Adelaide has seen no meaningful improvement, and Brisbane has only become more affordable very recently.
Affordability also needs to improve just to keep pace with the tightening in lending standards. In this sense, a given level of affordability today implies less borrower activity than it might have historically.
That means continuing to pull first home buyers into the market may be challenging. State government initiatives saw the number of first home buyers rise sharply in 2017, but they have since declined.