We estimate the RBA rate cuts and APRA’s removal of its interest rate serviceability floor may improve maximum borrowing capacity by around 14%. However, these changes need to be considered in the context of ongoing tightening, in particular a new HEM methodology, the rollout of Comprehensive Credit Reporting and Open Banking.
A new estimate of the Household Expenditure Measure (HEM, a floor on estimated living expenses in mortgage calculations) is being rolled out by the banks over coming months. Our channel checks indicate the revised HEM is skewed to higher income earners, especially above ~$120k. Although each bank now applies the HEM slightly differently, we estimate that for households with income above $150k (~33% of owner occupied mortgagors by number and 50% by value), the increase in HEM may more than offset the impact of lower interest rates and removal of APRA’s serviceability floor. Given ~50-60% of borrowers are still assessed using HEM assumptions, these changes may have a material impact on the housing market, especially in Sydney and Melbourne given higher median incomes and house prices. Investment property buyers are also generally higher income earners and will also be impacted by these changes. For lower income households, the impact of HEM changes is less material implying the benefit of rate cuts and removal of the serviceability floor may be more effective.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
