The federal government recently announced that state government-backed lender HomeStart has increased the minimum deposit for its graduate loan from 3% to 2% – a program that is seen as wiping out months of savings for those willing to apply.
Real estate investor and YouTuber PK Gupta hailed the policy, saying in his recent video that it would just be “additional firewood” for the state’s already scorching real estate market.
“Everyone knows Sydney and Melbourne [are] descent. The Brisbane property market has started to decline. But it is quite the opposite for Adelaide. In fact, it’s the hottest real estate market right now. [It’s] continues to grow at double-digit levels for 2022,” he said.
Mr. Gupta pointed out that with the graduate loan available in metropolitan and regional areas and with the federal government requiring the house to be purchased and built as the buyer’s primary residence, there is no other way. for demand in the region only to increase.
“And that’s really what’s driven the current property boom in South Australia. Over the last couple of years it’s been mainly driven by home buyers. These are people looking to live in their own home, modernizers or first-time home buyers,” he said.
And while the program is not available to interstate investors, the Consulting by PK founder explained why it would be a beneficial policy for people looking to enter the area’s real estate market.
“So if you’re an investor, of course, you can’t access this [scheme]. You must live in the house to access it.
“But it affects the real estate market you’re looking to buy in, because [property values] in South Australia or specific parts of Adelaide will continue to increase. There is no cap. You can buy a $2 million property or a $200,000 property – there’s no cap on that,” Gupta explained.
But the expert acknowledged that the brand new policy has drawn the ire of critics – particularly those who believe the regime will further undermine the country’s banking sector.
“You think, well, here is another policy that further destabilizes our banking system. Now all of these people will no longer be able to pay their mortgages when interest rates rise and this will create an even bigger collapse in the real estate market.
Mr Gupta lists two detailed reasons why South Australia’s new policy (and other home-buying schemes introduced by state governments) will not bring the country’s banking system up and running. therefore, the real estate market will soon be on its knees:
1. Delinquency rate is down since GFC
Mr. Gupta quoted the Australian Prudential Regulatory Authority data on delinquent loans as a percentage of advances as an indicator of the number of mortgage holders in Australia who have delayed or been unable to repay their mortgages in recent years.
While acknowledging that the data isn’t “super recent”, he focused on the historical trend and pointed out that it has been declining since the global financial crisis.
And while the rate of delinquent home loans is expected to rise as the Reserve Bank of Australia continues to tighten monetary policy, the expert stressed that any increases would come from “record” levels.
In the scenario where the delinquency rate, even if it reaches almost half of the GFC levels or at the same level as the levels seen during the GFC, Mr. Gupta said: “Everyone forgets that even in the GFC, [the] The Australian property market was down only around 8%.”
Additionally, he pointed out that even at the height of the previous major market downturn, there were “housing markets that continued to rise.”
2.The banking system has put in place strong mortgage stress cushions
Gupta said pessimists about new policies typically undermine the buffers banks have put in place when assessing new borrowers that effectively insulate both mortgage parties from any downside pressure.
For example, he noted that the requirements of South Australia’s new scheme would ensure that banks lend money to reliable borrowers.
“The Postgraduate Loan is available to South Australian residents with a Certificate III, IV, Diploma, [bachelor’s] degree or higher degree. So effectively what the bank or the lender is saying is that you are more reliable. You have certain qualifications, therefore, you don’t need to pay so much deposit,” he said.
He also reminded us that when a bank calculates a borrower’s creditworthiness, they are preparing for any worst-case scenario.
Mr. Gupta set an example for borrowers who took out a loan or refinanced with a standard variable rate of 1.89% in 2021.
He explained that when estimating a borrower’s ability to repay, the bank will assess a borrower’s ability to repay that loan at 3% higher interest rates, not just 1.89. %.
“And so the interest rates must rise by 3 percent, because in the bank’s calculation, mortgage owners or mortgage holders must be emphasized. And that’s not going to happen any time soon,” he explained.
On top of that, Mr Gupta stressed that the bank would take a borrower’s income into account when determining how much they could comfortably afford to pay – with additional caveats.
In terms of income, he explained, “What the bank does on top of that is they say, look, you’re making Pay As You Go income, great, we shave it off in the calculations to give you this loan at 1.89 [per cent] originally.
“Also, the rent that you get – because obviously it’s an investment property – the rent that you get, we’re going to reduce that. We’re going to assume that you’re only getting 70-80% of the rent that you actually get from this investment property.
He added that lenders put the same additional measures in place when calculating a borrower’s expenses to protect themselves and the borrower from default.
“When the banks assess you (borrower), they will increase your expenses. Let’s say your household budget is $2,000 to $3,000 per month. When the bank assesses you, it will take $4,000 or $5,000.
“So it says OK, your expenses according to your credit cards, according to what you showed, according to your bank account statement, we’re going to put an extra stamp, just in case,” he explained.
After analyzing these figures, Mr Gupta concluded: “So the people who got this 1.89% loan, the banks actually calculated it as if they were implicitly paying almost indirectly that they were paying 6% and that the interest rate did not rise to 6%.
The expert said that at most, analysts are predicting another 1% interest rate hike that will take the current cash rate from 1.85% to 2.85% – figures that are still “far from ” the 6% mark for the average standard variable loan rate. He also predicted that rates might even begin to stabilize in the near future.
On that note, Mr Gupta said: “This is what Australian banks have been doing for years and years and years. This is why Australia’s banking system is so strong.
Returning to South Australia’s new program, he concluded that investors need to look at the big picture in order to understand what the new policy will mean for the market.
“It’s a great policy, and it will attract a lot more people to the property market in South Australia.
“People who otherwise couldn’t afford it, who are just starting their professional careers, know you are qualified, and that would only boost the housing market in South Australia,” Mr Gupta surmised.