Property risks dip at Coalition win, APRA easing

UBS has materially reduced downside risk for housing as last Saturday's elections lay to rest Labor's negative gearing plans and separately, APRA is easing its stance on mortgage lending.

"The main implication of the election is the absence of expected Labor changes, especially to negative gearing, capital gains tax and franking; rather than the Coalition's mostly 'status quo'," UBS economists led by George Tharenou wrote in a May 21 note.

"While this likely has limited impact on our credit tightening thesis, it may stabilise sentiment and hence materially reduces downside risk to the UBS outlook for housing and the negative wealth effect on the consumer and economy."

The Coalition also promised incentives for first home buyers, which may get a boost from APRA's announcement that it was looking at relaxing lending requirements for mortgage lending.

The prudential regulator currently asks authorised deposit-taking institutions (ADIs) to use the higher of two metrics (7% interest floor or the loan's rate plus 2%) while calculating the borrower's ability to service the loan.

It is now considering allowing ADIs to set their own minimum interest rate floor (currently 7%) provided it is 2.5% higher than the interest rates, with a four-week consultation period starting on June 18.

"APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk. Although many of those risk factors remain - high house prices, low interest rates, high household debt, and subdued income growth - two more recent developments have led us to review the appropriateness of the interest rate floor," APRA chair Wayne Byres said.

"With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases - possibly unnecessarily so."

UBS economists said the APRA easing is a material surprise, joining the Liberal's 'miracle' election win, and first home buyer scheme, all of which it thinks are positives for housing.

"[This] materially reduces downside risk for housing and the economy. However, given ongoing expense verification (plus expected rollout of comprehensive credit reporting and debt-to-income), it's unlikely to reflate housing on its own."

UBS has revised its peak-to-trough drop in house prices closer to -10%, rather than -14%; with home loans now troughing closer to -30%, rather than its risk scenario of -40%.

"This probably doesn't stop the RBA cutting rates, UBS said but [RBA governor Philip] Lowe's speech yesterday is key the Coalition proposed incentives for first home buyers."

The Coalition's election promises of tax cuts, which will represent 0.5% of the GDP, will help consumption but may not be enough to offset falling house prices, according to AMP Capital.

"This will help consumption, but the negatives from falling house prices are likely to outweigh the stimulus households will receive from the Federal government," AMP Capital senior economist Diana Mousina said.

"It has indicated it will assist those property buyers with a deposit of only five per cent. This should help first home buyers to get a loan without having to take out lenders' mortgage insurance. But it does create potential risks around lending criteria and lending to households with a smaller deposit," Mousina said.

Read more: APRAUBSCoalitionDiana MousinaFederalGDPGeorge TharenouLiberalPhilip LoweWayne Byres
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