A further lending clampdown seems increasingly likely for the housing market, and house prices in locations in Sydney and Melbourne may be the most impacted in the immediate term.
Lending curbs looming
The market regulator APRA has already announced changes to serviceability buffers, and there may be caps on debt-to-income ratios to follow next year.
The rules are likely to reduce the borrowing capacity of homebuyers. The most impacted property types will be family homes in areas where the price to income ratios have already become stretched, especially beyond the $1 million to $1.2 million-plus price range, where many dual-income households will cap out. In the price brackets under $1 million, we should expect to see less impact on the market.
Buyers are likely to remain active but may need to adjust their budget and expectations slightly if the changes occur.
Further cooling measures in 2022 could include restrictions to borrowers at more than six times income, potentially including floor assessment rate changes.
Some borrowers might still move to non-bank lenders, offsetting the restrictions to some degree. However, we still think the higher end of the market will be impacted most in 2022, while units look like good value in Sydney and Melbourne now.
The top 20 impacted locations
Locations in Greater Sydney and Greater Melbourne where house price to income ratios are already well above six times may be impacted to some degree. Our analysis highlights twenty locations where the median house price to household income ratios are around nine times or above.
In these locations, a reduction in borrowing capacity of potentially up to 15 per cent would have a noticeable impact on market dynamics. These changes would not be as dramatic as those experienced through the macroprudential measures of 2017. Still, they would have a temporary cooling effect on highly leveraged housing market sectors in Sydney and Melbourne.
| State | GCCSA | SA4 region | Median house price ($) | Loan amount – 65% LVR ($) | Household income ($) | House price/median household income |
| NSW | Sydney | Eastern Suburbs | 3,850,759 | 2,502,993 | 112,476 | 22.3 |
| NSW | Sydney | North Sydney & Hornsby | 2,871,751 | 1,866,703 | 121,316 | 15.4 |
| NSW | Sydney | Northern Beaches | 2,676,173 | 1,739,512 | 113,256 | 15.4 |
| NSW | Sydney | Inner West | 2,293,545 | 1,490,804 | 102,128 | 14.6 |
| NSW | Sydney | Ryde | 2,236,606 | 1,453,794 | 99,788 | 14.6 |
| VIC | Melbourne | Inner East | 1,948,445 | 1,266,489 | 91,312 | 13.9 |
| VIC | Melbourne | Inner South | 1,878,414 | 1,220,969 | 93,236 | 13.1 |
| VIC | Melbourne | Inner Brisbane | 1,687,385 | 1,096,801 | 88,348 | 12.4 |
| NSW | Sydney | City & Inner South | 1,867,331 | 1,213,765 | 98,488 | 12.3 |
| NSW | Sydney | Inner South West | 1,360,973 | 884,663 | 74,412 | 11.9 |
| NSW | Rest of NSW | Richmond – Tweed | 921,703 | 599,107 | 55,588 | 10.8 |
| NSW | Sydney | Sutherland | 1,647,747 | 1,071,036 | 102,908 | 10.4 |
| NSW | Melbourne | Mornington Peninsula | 1,036,896 | 673,983 | 67,756 | 9.9 |
| NSW | Rest of NSW | Shoalhaven/S. Highlands | 855,695 | 556,202 | 56,732 | 9.8 |
| NSW | Sydney | Parramatta | 1,185,882 | 770,823 | 79,040 | 9.8 |
| WA | Perth | Inner Perth | 1,571,020 | 1,021,263 | 106,028 | 9.6 |
| NSW | Sydney | Baulkham Hills and Hawkesbury | 1,680,838 | 1,092,545 | 118,040 | 9.3 |
| NSW | Sydney | Central Coast | 908,791 | 590,714 | 65,416 | 9.0 |
| QLD | Rest of QLD | Sunshine Coast | 899,962 | 584,976 | 65,520 | 8.9 |
| NSW | Rest of NSW | Illawarra | 952,391 | 619,094 | 70,304 | 8.8 |
Incomes are high in Canberra, so that market might be less impacted, while much of the money driving the market in Queensland is coming from the southern capital cities.
We believe property investors will remain active overall simply because rental prices have been rising, and the cost of borrowing has moved considerably lower, making for an attractive cash flow outcome. But the top end of the market, dominated by owner-occupiers, will likely see some cooling.
There has been some pull-forward of enquiries and demand as property buyers look to lock in mortgage pre-approvals before the advent of any such changes. There is a sense of looking to get moving in advance of any potential restrictions, especially now that one-to-one inspections have become a possibility in Melbourne again.
Summary of impacts
Over the long term, changes to lending rules are unlikely to impact housing prices, but they will likely change the shape of the lending market in the short term.
Overall, expect to see fewer first home buyers active in 2022, with the stimulus measures wearing off and borrowing power for single income earners being reduced. But investors will be active, especially up the $1 million price range.
