Will the Liberals' $40K Borrowing Boost Help Homebuyers — or Hurt the Market?

​In response to Australia's ongoing housing affordability challenges, the Liberal Party has proposed reforms aimed at increasing individuals' borrowing capacities to facilitate home purchases. Specifically, they suggest reducing the Australian Prudential Regulation Authority's (APRA) serviceability buffer from its current 3% to pre-COVID levels of 2.5% or even 2%. This buffer is an additional interest rate margin applied during loan assessments to ensure borrowers can manage potential future rate increases. Lowering this buffer would effectively raise the amount prospective homebuyers can borrow. 

Potential Benefits

Proponents of the policy argue that easing lending restrictions could assist first-time homebuyers, particularly those without access to familial financial support, in entering the property market. By reducing the serviceability buffer, more individuals might qualify for loans, thereby increasing homeownership opportunities. ​

Concerns and Criticisms

However, several economists and housing market analysts have expressed reservations about the proposed changes:​

• Increased Housing Demand: Enhancing borrowing capacity may lead to heightened demand for housing. Without a corresponding increase in supply, this surge in demand could drive up property prices, potentially negating the intended affordability benefits. ​

• Minimal Impact on Affordability: Analysts suggest that the proposed reduction in the serviceability buffer would only marginally improve affordability. Given current median property prices, the increase in borrowing capacity might not be substantial enough to make a significant difference for many buyers.

• Risk of Mortgage Stress: Lowering lending standards could expose borrowers to greater financial risk, especially if interest rates rise in the future. This scenario could lead to increased mortgage stress and higher default rates among homeowners. ​

Alternative Solutions

Many experts emphasise that addressing housing affordability requires a multifaceted approach, with a particular focus on increasing housing supply. Measures such as investing in infrastructure to support new developments, streamlining planning approvals, and encouraging the construction of affordable housing are considered more effective in achieving long-term improvements in housing affordability. ​

Conclusion

While the Liberal Party's proposal to reduce the serviceability buffer aims to assist prospective homebuyers by increasing borrowing capacity, it has garnered mixed reactions. Critics argue that without addressing underlying supply constraints, such measures may inadvertently exacerbate housing affordability issues by fueling price increases. A comprehensive strategy that combines demand-side initiatives with robust efforts to boost housing supply is widely advocated to effectively tackle the complexities of Australia's housing affordability crisis.