Living Expenses in the spotlight

TL;DR

The banks' home loan affordability assessments, based on conservative assumptions, have allowed buyers to borrow more, potentially driving property prices. Changes in living cost measures and tightening regulations may impact borrowing limits and property prices.

Transcript

g'day and welcome to this week's video this week we're going to look at home loan affordability and discuss some recent articles that was in the news that was really looking at some of the basis that the banks used to help determine how much you can borrow now just initially we've got a certain amount of research from Mayo economists Tim farily a g... Read More

Key Insights

• 🤑 Home loan affordability, driven by cheap and easy money, plays a significant role in determining property prices.
• 👪 Expenditure assumptions used by banks for home loan affordability are often conservative and underestimate actual living costs.
• 🥺 Using higher living cost measures in home loan assessments can lead to decreased borrowing limits and potentially impact property prices.
• 👪 The banking Royal Commission is investigating home loan affordability issues along with other misconduct in the industry.
• ⛔ Stricter regulations and assessments from the Australian Prudential Regulation Authority (APRA) may impact borrowing limits and property prices in the future.
• 👻 The majority of home loans in Australia have been assessed based on lower expenditure measures, allowing borrowers to access higher loan amounts.
• 👯 Changes in home loan affordability assessments may limit the amount people can borrow, affecting the housing market.

Questions & Answers

Q: How do banks determine how much an average buyer can borrow for a home loan?

Banks use home loan affordability assessments, which consider the buyer's income and expenditure assumptions. These assumptions often underestimate actual living costs, allowing buyers to borrow more.

Q: What are the potential consequences of using conservative expenditure assumptions for home loan affordability?

Using low expenditure assumptions can inflate borrowing limits and contribute to rising property prices. If realistic living cost measures are used, borrowing limits may decrease, impacting the housing market.

Q: What is the role of the banking Royal Commission in addressing the issues related to home loan affordability?

The banking Royal Commission is primarily focused on investigating misconduct but is also looking into home loan affordability issues. Tightening regulations and stricter assessments may result from the Commission's findings.

Q: How does the majority of home loans in Australia currently rely on home expenditure measures?

Approximately 75% of all home loans in Australia have been assessed based on basic home expenditure measures, which are lower than realistic living costs. This has allowed borrowers to obtain larger loan amounts.

Summary & Key Takeaways

• Mayo economist Tim Farily's research shows that house prices, including residential property, are influenced by home loan affordability and the availability of cheap and easy money.

• Expenditure assumptions made by banks for home loan affordability are often low, as low as $32,400 per year for a family of four, which is unrealistic.

• If banks started using higher living cost measures, such as $58,200 per year, borrowing limits would decrease by 28.5%, potentially impacting property prices.