The Australian Prudential Regulation Authority (APRA) has confirmed its decision to keep the mortgage serviceability buffer unchanged at 3%, citing ongoing economic uncertainty. The regulator deemed the buffer level appropriate given the challenges posed by the labor market, inflation trends, and interest rate fluctuations.
Economic Risks Persist Despite Some Improvements
While economic risks have evolved over the past year, APRA highlighted that borrowers still face potential financial shocks. The regulator noted a reduced likelihood of persistent high inflation and imminent cash rate hikes but acknowledged the continued risk of rising unemployment and sustained cost-of-living pressures. These factors, APRA warned, could significantly impact household incomes.
APRA’s Perspective on the Current Landscape
APRA Chair John Lonsdale elaborated on the decision, explaining, “Since our last review in July, inflation has shown signs of easing, and the risk of higher interest rates has diminished. However, we remain cautious about potential shocks to household incomes stemming from a weakening labor market.”
Lonsdale also pointed to external global factors, including geopolitical instability, as contributing to economic uncertainty. Despite these challenges, he emphasized that credit remains available to households and businesses with strong borrowing credentials.
Household Debt and Non-Performing Loans Under Scrutiny
APRA underscored the vulnerabilities posed by high household debt levels, which remain elevated compared to long-term trends and international standards. House prices, although stabilizing, are still 40% higher than pre-pandemic levels, exacerbating debt-to-income ratios.
Additionally, an uptick in non-performing loans has raised concerns. “We are closely monitoring the potential for further increases in non-performing loans, particularly if unemployment rises,” Lonsdale said.
Serviceability Buffer Continues to Shape Borrowing Behavior
The serviceability buffer, designed to ensure borrowers can handle potential rate increases, is functioning as intended, limiting the borrowing capacity of those at or near their maximum financial thresholds. APRA noted that housing credit growth remains aligned with historical averages, and the buffer helps maintain stability in the lending market.
When assessing the buffer, APRA considers its impact on various borrower groups, including first-home buyers. Encouragingly, the proportion of new lending to first-home buyers is consistent with long-term averages, indicating that access to credit remains balanced despite macroprudential settings.
How This Could Impact the Gold Coast Real Estate Market
The Gold Coast real estate market, known for its strong demand and diverse buyer pool, is likely to feel the effects of APRA’s decision to maintain the serviceability buffer. Here’s how:
1. Moderate Borrowing Capacity
The unchanged serviceability buffer means that borrowers will still be assessed on their ability to manage interest rates 3% higher than their loan rate. This conservative approach could limit the borrowing power of buyers in the Gold Coast, particularly first-home buyers and investors seeking properties at their maximum borrowing capacity. For local real estate agents, this may result in longer transaction times as buyers adjust their budgets or secure alternative financing.
2. Stability in the Investment Market
Investor activity plays a significant role in the Gold Coast market, particularly in high-yield properties like duplexes and units. While APRA’s buffer maintains a level of caution, it also reassures investors of market stability by controlling risky lending practices. Investors who are well-positioned financially may continue to see opportunities in the region, especially with rental demand remaining strong and property prices holding firm.
3. Pressure on Affordability
The Gold Coast’s property prices, which have surged in recent years, are already challenging affordability for many buyers. APRA’s unchanged buffer could amplify this pressure by restricting borrowing capacity just as some buyers are starting to return to the market. This could lead to greater competition for lower-priced properties, such as apartments and townhouses, which remain within reach for a larger segment of buyers.
4. Impact on Sellers
For sellers, the decision may mean fewer buyers in the market with the capacity to purchase premium properties. However, stable borrowing conditions could also result in more serious buyers entering the market, leading to efficient sales for appropriately priced homes. Sellers may need to adjust expectations, particularly in the luxury segment, to align with buyer capacity under the buffer restrictions.
5. Continued Strong Rental Demand
The Gold Coast’s high rental demand may offset potential buyer hesitancy caused by borrowing constraints. Investors with the capacity to navigate APRA’s buffer could find opportunities to capitalize on robust rental yields, particularly in areas popular with tenants, such as Broadbeach, Southport, and Robina.
6. Global Uncertainty and Local Resilience
With APRA highlighting global economic uncertainty and geopolitical instability, the Gold Coast market may benefit from its status as a lifestyle destination. Buyers seeking security and quality of life could continue to gravitate toward the area, underpinning demand despite broader economic challenges.
Final Thoughts
APRA’s cautious approach to the serviceability buffer aims to maintain stability in a volatile economic climate, which is both a challenge and an opportunity for the Gold Coast real estate market. While borrowing constraints could limit some buyers, the market’s inherent appeal—driven by lifestyle, strong rental yields, and investor interest—positions it to remain resilient. Sellers, buyers, and investors should consider the broader economic landscape and adjust their strategies accordingly.
