Property Market – Page 183 – Digital Finance Analytics (DFA) Blog

More On Rental Yields – It Matters Where You Buy

We continue our update on our rental yield modelling, using data from our household surveys. Last time we looked across the average gross and net yields (in cash-flow terms) by state, and also at average capital gains. Today we drill into the location specific analysis and also look at our master household segmentation.

But before we look at the data specifically, it is worth reflecting on why we show the data the way we do. New rules from Basel will require banks to hold more capital against loans which are required to be serviced from income other than rent. As a result, the question of net yield – meaning rental income, less loan repayments and other costs before tax suddenly become more important. Whilst the Basel rules are yet to be finalised (there are internal squabbles between members as to where to set the limits), this data is significant – and needs to be separated from any equity held in the property – as equity is no guide to loan serviceability, only an indicator of potential risk should a sale be forced.

So now we turn to our household master segments. We find a startling truth. Most affluent households seem to be able to hold investment property where net yields are still positive, whereas less affluent households – those on the urban fringe, battlers, stressed older households and multicultural segments, as well as young growing families; on average have net yields in negative territory. Whilst there are a smaller number of these households, compared with the number of more affluent households who hold investment property, it is telling. In addition – and no surprise – more affluent households on average have more equity in the property (and more properties per household).

Another way to look at the investment portfolio is by regions and locations. We use a list of 50 or so, which cover the country. There are variations across these. On average households in Horsham, Ballarat and Wangaratta have little equity in their investment properties, and are well underwater in terms of net rental yields.

At the other end of the spectrum, investment properties in Darwin, Tasmania and areas of Queensland are in much more positive territory.

Investors in Warnambool, Canberra and in the Central Coast have the highest average paper capital profits (current property value less outstanding mortgage). But of course many investment households have large mortgages so they can offset interest against other income thanks to negative gearing.

The pressure of rising investment loan interest rates, low rental income growth, and in some cases, vacant property are all having an impact. But the fallout is not equally spread across the country, or across households.

Is big business, super funds the key to fixing social housing problem in Australia?

From The Herald Sun.

PHILANTHROPISTS, charities, superannuation funds and publicly-minded big business will be encouraged to build and manage social housing developments in a bid to dramatically boost the number of social houses available across Australia.

Treasurer Scott Morrison said major changes were needed in the way social housing was provided, to make it more attractive to the private sector.
The Lend Lease housing development in London is designed to provide affordable housing but also ensure profits for developers. Picture: Ella Pellegrini
Speaking at a $3.8 billion new housing estate in London which has set 25 per cent of its new houses aside for affordable housing, Mr Morrison said governments provided almost all of the social housing in Australia, but demand was outstripping supply.

“There are currently over 180,000 people on social housing waiting lists across Australia,’’ he said.

“The number of social housing dwellings would need to grow by almost 50 per cent in order to accommodate this number of people.

“At present the Commonwealth and state and territory governments combined are spending over $10 billion a year on housing but it is failing to improve outcomes, particularly for those with low-moderate incomes.’’

Mr Morrison will today launch a discussion paper on ways to increase the practise known as social impact investment, to get private sector involvement in the social housing market.

The aim is to make building, supplying and managing social housing an attractive business proposition, as well as being a good thing to do for the community.

At its core it is designed to deliver better outcomes for the people who use the service but it also needs to provide a financial return.

“If social impact investing doesn’t make money then people won’t do it,’’ Mr Morrison told News Corp.

“It’s not social impact benevolence. It’s social impact investment.’’

The Government could play a role by reducing the cost and burden of compliance, being a co-owner of a development, getting rid of legal barriers, helping organisations access low-cost, long-term finance, and potentially direct-paying Commonwealth rental assistance to landlords.

“A key objective is to create an enabling environment for social impact investment that doesn’t displace private sector financing,’’ Mr Morrison said.

Social impact investing can be done through issuing social impact bonds, which the New South Wales and South Australian governments are already doing on a project-by-project basis.

But large-scale private projects do not yet exist in Australia.

Mr Morrison this week toured the Elephant Gate project being developed by Lend Lease in Southwark, south London.

The project saw the notorious, crime-riddled Heygate council estate bulldozed, and a new development of 3000 homes go up in its place, incorporating community facilities such a skills centre, where trainees worked on the site.

A quarter of the properties were set aside for affordable housing — half of them available under shared ownership, where the owners buy just a portion of their home, according to their incomes.

The other homes are social housing, scattered throughout the entire complex, where tenants pay a capped rent, under the deal between Lend Lease and the Southwark Council.

“We don’t really have projects like this in Australia and it is does require a capacity in state governments, a capacity even in the Federal Government as well as building up our social organisations,’’ he said.

“You’ve got to get the returns, that’s the other challenging thing.

“You’ve got to get the security of income and that really does require you to rethink using your Commonwealth rental assistance and how you’re using welfare payments and getting a guarantee that rent is going to turn up in the bank account.

“When you start getting a more guaranteed income stream for these types of developments that’s far more attractive to the developers, far more attractive to the institutional investors.’’

High Household Debt Kills Real Growth

A new working paper from the BIS “The real effects of household debt in the short and long run” shows that high household debt (as measured by debt to GDP) has a significant negative long term effect on consumption, and so growth.

A 1 percentage point increase in the household debt-to-GDP ratio tends to lower growth in the long run by 0.1 percentage point. Our results suggest that the negative long-run effects on consumption tend to intensify as the household debt-to-GDP ratio exceeds 60%. For GDP growth, that intensification seems to occur when the ratio exceeds 80%.

Moreover, the negative correlation between household debt and consumption actually strengthens over time, following a surge in household borrowing. What is striking is that the negative correlation coefficient nearly doubles between the first and the fifth year following the increase in household debt.

Bad news for Australian households where the ratio is well above 80%, at 130%.

This is explained by massive amounts of borrowing for housing (both owner occupied and investment) whilst unsecured personal debt is not growing. Such high household debt, even with low interest rates sucks spending from the economy, and is a brake on growth. The swelling value of home prices, and paper wealth (as well as growing bank balance sheets) do not really provide the right foundation for long term real sustainable growth.

Note: BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS.

A $90 Billion Debt Wave Shows Cracks in U.S. Property Boom

From Bloomberg.

A $90 billion wave of maturing commercial mortgages, leftover debt from the 2007 lending boom, is laying bare the weak links in the U.S. real estate market.

It’s getting harder for landlords who rely on borrowed cash to find new loans to pay off the old ones, leading to forecasts for higher delinquencies. Lenders have gotten choosier about which buildings they’ll fund, concerned about overheated prices for properties from hotels to shopping malls, and record values for office buildings in cities such as New York. Rising interest rates and regulatory constraints for banks also are increasing the odds that borrowers will come up short when it’s time to refinance.

“There are a lot more problem loans out there than people think,” said Ray Potter, founder of R3 Funding, a New York-based firm that arranges financing for landlords and investors. “We’re not going to see a huge crash, but there will be more losses than people are expecting.”

The winners and losers of a lopsided real estate recovery will be cemented as the last vestiges of pre-crisis debt clear the system. While Manhattan skyscraper values have surged 50 percent above the 2008 peak, prices for suburban office buildings still languish 4.8 percent below, according to an index from Moody’s Investors Service and Real Capital Analytics Inc. Borrowers holding commercial real estate outside of major metropolitan areas are now feeling the pinch as they attempt to secure fresh financing, Potter said.

The delinquency rate for commercial mortgages that have been packaged into bonds is forecast to climb by as much as 2.4 percentage points to 5.75 percent in 2017, reversing several years of declines, as property owners struggle with maturing loans, according to Fitch Ratings. That sets the stage for bondholder losses.

CMBS Record

Banks sold a record $250 billion of commercial mortgage-backed securities to institutional investors in 2007, and lax lending standards enabled landlords across the U.S. to saddle buildings with large piles of debt. When credit markets froze the following year, Wall Street analysts warned of a cataclysm, with $700 billion of commercial mortgages set to mature over the next decade.

“At the depths of the panic, it was just that: panic,” said Manus Clancy, a managing director at Trepp LLC, a firm that tracks commercial-mortgage debt. “That made people’s future expectations extremely bearish. Extremely low interest rates over the last four or five years have forgiven a lot of sins.”

The CMBS market roared back after an 16-month shutdown, and lenders plowed into real estate as an antidote to skimpy returns for other investments. The cheap loans helped propel property values to record highs in big cities such as New York and San Francisco, alleviating concerns about the mountain of debt coming due.

Credit for property owners has once again become scarce in some pockets. Borrowing costs jumped following the surprise election of President Donald Trump, and Wall Street firms are being more cautious as new regulations kick in requiring them to hold a stake in the mortgages they sell off. Other lenders are scaling back on commitments to property types and locations where problems have gotten harder to ignore.

Struggling Malls

Lenders are taking an increasingly dim view of retail properties — especially malls — as the growth of e-commerce eats into sales at brick-and-mortar stores. Malls tend to have higher loss rates than other property types after a default, increasing the stigma for lenders, according to Lea Overby, an analyst at Morningstar Credit Ratings LLC.

When malls “start to go downhill, if nothing is done to turn the ship around, they plummet,” Overby said. “The fate of some of these malls is very, very uncertain.”

The Sunset Mall in San Angelo, Texas, added a glow-in-the-dark mini golf course in June, part of a nationwide trend of retailers trying to lure customers with experiences they can’t find online. Yet when a $28 million mortgage came due in December, the borrower couldn’t refinance it, according to data compiled by Bloomberg. The debt, part of a bond deal sold by Citigroup Inc. and Deutsche Bank AG in March 2007, was handed off to a firm specializing in troubled loans.

A similar storyline is playing out at a 82,000-square-foot (7,600-square-meter) suburban office complex in Norfolk, Virginia, whose tenants include health-care services firms. The borrower stopped making payments on a $20 million loan that comes due next month and can’t refinance the debt, Bloomberg data show.

Representatives for the owners of the properties didn’t respond to phone calls seeking comment on the loans.

Manhattan Tower

Landlords that own high-profile buildings in big cities are faring better. At 5 Times Square, the Manhattan headquarters for Ernst & Young LLP, the owners are close to securing a five-year loan to pay off $1 billion in debt that comes due in March, according to Scott Rechler, chief executive officer of RXR Realty, which owns 49 percent of the building. RXR acquired its stake in the 39-story tower shortly after the building was sold to real estate investor David Werner for $1.5 billion in 2014.

“We are currently reviewing term sheets from a number of institutions and expect to settle on a lender within a week or so,” Rechler said.

Some borrowers chipped away at the maturity wall by retiring their mortgages early in order to take advantage of ultra-low interest rates. At the same time, landlords with the weakest properties have already defaulted, further reducing the pool of loans that need to be refinanced. The maturity wall has been whittled down to about $90 billion from $250 billion in 2008, according to data from Morningstar. The firm estimates that roughly half of the remaining loans will have difficulty refinancing.

S&P analysts are predicting that about 13 percent of real estate loans coming due will ultimately default, up from 8 percent over the past two years, according to Dennis Sim, a researcher at the firm. That’s their base case, but the default rate could be higher, he said.

“There are a lot of headwinds currently — with the interest-rate increase, with the new administration coming in, and also risk retention,” Sim said. “Those three wild-card factors could also play a role in how some of the better-performing loans are able to refinance or not.”

Rental Stress Now Hits 42.5% of Low Income Households

The latest report from the Productivity Commission “Report on Government Services 2017, Volume G: Housing and homelessness” shows rental stress is on the rise. Nationally, the proportion of low income renter households in rental stress increased from 35.4 per cent in 2007-08 to 42.5 per cent in 2013-14.

This is an indirect, but significant impact of the ever rising un-affordable housing burden.

In addition, the report included data on Commonwealth Rent Assistance (CRA) showing a rise in payment to reduce rental stress, of $4.4 billion in 2015-16. A further hidden impact of high housing costs.

CRA helps eligible people meet the cost of rental housing in the private market, aiming to reduce the incidence of rental stress. It is an Australian Government non-taxable income supplement, paid to recipients of income support payment, ABSTUDY, Family Tax Benefit Part A, or a Veteran’s service pension or income support supplement.

Australian Government expenditure on CRA was $4.4 billion in 2015-16, increasing in real terms from $3.6 billion in 2011-12. The average government CRA expenditure per eligible income unit was $3251 in 2015-16.

Nationally in June 2016, there were 1 345 983 income units receiving CRA . Of these, 79.4 per cent paid enough rent to be eligible to receive the maximum rate of CRA (an increase from 75.0 per cent in 2012).

The median CRA payment at June 2016 was $130 per fortnight, with median rent being $437 per fortnight.

CRA and rental stress

Rental stress is defined as more than 30 per cent of household income being spent on rent, and is a separate sector-wide indicator. CRA is indexed to the Consumer Price Index (CPI) but rental costs have increased at a faster rate than the CPI since 2008 (ABS 2016), so the real value of CRA payments has decreased for individuals in that time.

Nationally in June 2016, 68.2 per cent of CRA income units would have paid more than 30 per cent of their gross income on rent if CRA were not provided — with CRA this proportion was 41.2 per cent.

The table below presents a range of CRA data, including Australian Government expenditure and information on CRA income units — including Aboriginal and Torres Strait Islander recipients, those with special needs — and those in rural and remote areas.

Housing affordability and the changing debt burden

Excellent opinion piece (and charts) in the Guardian by Philip Soos, which nicely underscores the debt burden issue we have been highlighting.

Australia’s historically high and rising housing prices are widely debated and have prompted a number of government inquiries into housing affordability.

The question stands open: is housing affordable in Australia?

Affordability is often confused with related concepts such as ease of entry, serviceability and valuation. Ease of entry refers to the difficulty of purchase, whereas serviceability measures the burden of mortgage repayments relative to household income.

Valuation considers whether prices are efficient relative to economic fundamentals. Opinions are divided on this: housing prices could be 30% undervalued, a bubble which is 40% overvalued, or somewhere in between.

It is often claimed housing is affordable because nominal mortgage interest rates are low, having significantly declined since the peak of 17% in 1990. The standard mortgage payment formula shows nationwide debt repayments relative to household incomes are lower today than in 1990 and the smaller peak in 2008.

This metric is problematic because it is static, capturing the payments-to-income ratio at each particular point in time. The ratio at the peak in 1990, for instance, is very high if, and only if, prices, interest rates and incomes are constant over the life of the mortgage. This doesn’t reflect reality and a more dynamic approach is required.

First, the deposit-to-income ratio is the highest on record. Lenders may accept smaller deposits today but this is not a genuine choice for first home buyers. Starting out with larger loan repayments and lower equity is unlikely to be compensated for in a low interest rate and anaemic wage growth environment, especially with the added cost of lenders mortgage insurance.

Second, due to larger mortgages, repayments are higher than suggested by interest rates alone. Unfortunately, principal repayments are not officially recorded in our national accounts. The Bank of International Settlements has developed internationally standardised debt service ratios (DSR) to derive estimates of aggregate principal and interest repayments to income.

Household debt and prices escalated, interest rates declined and principal payments rose over the years. The gap has widened between interest payments to income and the DSR from around 1% between the late 1970s and early 1990s to a record 6% today.

By disregarding rising principal payments, vested interests downplay the immense debt burden assumed with a typical mortgage.

Worryingly, the bank states, “the DSR is a reliable early warning indicator for systemic banking crises. Furthermore, a high DSR has a strong negative impact on consumption and investment.” The DSR is currently 15% nationwide, far higher than the US, UK and Spain at the peaks of their housing bubbles. Estimates of the DSR for New South Wales and Victoria are 18%, which demonstrates extreme indebtedness.

Third, past research from the RBA recently surfaced in the media, examining the effects of wage inflation on mortgage payments. While high interest rates result in onerous payments relative to income, this only occurs in the early phase as high wage growth inflates away the burden. In contrast, borrowers facing high housing prices with low interest rates and poor wage growth face a greater burden across the life of the mortgage due to greater payments-to-income.

Everyone apart from the very wealthy has to purchase with a mortgage. Therefore, only by anchoring serviceability of payments-to-income can a genuine estimate of affordability be made. Generally, 30% of income is the accepted maximum.

High wage growth relative to interest rates and prices during the 1960s and 1970s made housing quite affordable. Higher prices and interest rates in the 1980s increased the burden. When interest rates peaked in 1990, payments were arduous but quickly declined.

While interest rates and wage growth for the next 25 years cannot be known, they are assumed to hold still at the present rates: 5.7% for the average imputed mortgage interest rate and 1.4% for wages. While the present interest rate may seem high, lower rates will inevitably prompt further housing price growth.

Buyers from, say, 2010 face onerous payments over the life of their mortgage compared to those who purchased in 1980 and 1990 when interest rates were much higher. The average ratio across the lifetime of the mortgage for all purchases dates are 1960 (10%), 1970 (10%), 1980 (18%), 1990 (27%), 2000 (23%) and 2010 (37%).

Although not shown, affordability is even worse in 2016 due to rising prices, with an estimated average payment ratio of 42%. The payment burden for 2010 and 2016 is still extreme and higher than 1990, even when factoring in lower estimated interest rates (4%) and higher wage growth (2%).

The measures presented above are absent from mainstream analysis today precisely because they demonstrate severe unaffordability, confirmed by the highest deposit-to-income ratios, the highest debt repayments relative to income over the lifetime of the mortgage and very high DSRs. Over 50% of first home buyers today are reliant on parental assistance.

There are three ways to assist affordability: declining interest rates, rising wage growth and falling housing prices. Aspiring first home buyers are severely disadvantaged; nominal wage growth is currently at the lowest level since the second world war and there is little room for interest rates to go lower. The only path to improved affordability is by reducing housing prices.

This is obviously opposed by political parties, the finance, insurance and real estate sector and economists employed by vested interests. Instead, we are bombarded with a disgraceful litany of pronouncements, fabricated to defend record high housing prices and unaffordability.

Young adults are condemned as lazy and inept, allegedly misspending their income on alcohol or stuffing themselves with smashed avocado toast in hipster cafes. To protect unjustified privilege – unearned rises in housing prices – vested interests have twisted a very real affordability crisis into moral failing by the young. They are told to get onto the housing ladder by purchasing an investment property or to “get a good job”.

The appalling government report recently published on home ownership (at which I testified) was a miserable 45 pages short and made no recommendations. The government made no pretense of objectivity; dissenting reports by the ALP and Greens were more informative.

The evidence shows housing prices and unaffordability are at record highs. This appalling state of affairs is maintained by an undemocratic politburo of vested interests accustomed to extracting a staggering proportion of unearned income and wealth. Manufacturing claims of youthful indolence is merely another day at the office.

Will anything be done to lower housing prices? On the contrary, the politburo endlessly champions higher prices by seeking further interest rate cuts, increasing our already third-world rates of population growth via immigration and could implement another inflationary first home owners boost on the pretext of assisting first home buyers – which enriches existing landholders and bankers.

The state of policymaking and economic management in Australia is extremely poor and entirely intentional. If the young are to learn an important lesson, it is this: no matter how hard things are, vested interests are committed to making their lives ever more difficult.

ABC News 24 Does Household Mortgage Rate Sensitivity

We discussed the mortgage rate sensitivity analysis we recently completed on News 24 tonight.

One in five homeowners will struggle with rate rise of less than 0.5%

From News.com.au

ONE in five Australians are walking such a fine mortgage tightrope that they could lose their homes if interest rates rise by even 0.5 per cent.

Our love affair with property has pushed Australia’s residential housing market to an eye-watering value of $6.2 trillion.

But as we scramble over each other to snap up property while interest rates are at historic lows, we have gotten ourselves into a bit of a pickle. We might not actually be able to afford funding our affair.

An analysis, based on extensive surveys of 26,000 Australian households, compiled by Digital Finance Analytics, examined how much headroom households have to rising rates, taking account of their income, size of mortgage, whether they have paid ahead, and other financial commitments. And the results are distressing.

It showed that around 20 per cent — that’s one in five homeowners — would find themselves in mortgage difficulty if interest rates rose by 0.5 per cent or less. An additional 4 per cent would be troubled by a rise between 0.5 per cent and one per cent.

Almost half of homeowners (42 per cent) would find themselves under financial pressure if home loan interest rates were to increase from their average of 4.5 per cent today to the long term average of 7 per cent.

“This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards,” Digital Finance Analytics wrote.

The major banks have already started increasing their home loan rates this year, despite the market broadly expecting the Reserve Bank to keep the cash rate steady at 1.5 per cent this year.

Just this week NAB upped a number of its owner-occupied and investment fixed rate loans.

“There are a range of factors that influence the funding that NAB — and all Australian banks — source, so we can provide home loans to our customers,” NAB Chief Operating Officer, Antony Cahill, said of the announcement.

“The cost of providing our fixed rate home loans has increased over recent months.”

So as interest rates rise and leave mortgage holders in its dust, it leaves a huge section of society, and our economy, exposed and at risk.

NOT TERRIBLY SURPRISING

Martin North, Principal of Digital Finance Analytics, said the results are concerning, albeit not surprising.

“If you look at what people have been doing, people have been buying into property because they really believe that it is the best investment. Property prices are rising and interest rates are very low, which means they are prepared to stretch as far as they can to get into the market,” Mr North told news.com.au.

But the widespread assumption that interest rates will remain at historic lows is a disaster waiting to happen, especially in an environment where wage growth is stagnant.

“If you go back to 2005, before the GFC, people got out of jail because their incomes grew a lot faster than house prices, and therefore mortgage costs. But the trouble is that this time around we are not seeing any evidence of real momentum in income growth,” Mr North said.

“My concern is a lot of households are quite close to the edge now — they are not going to get out of jail because their incomes are going to rise. We are in a situation where interest rates are likely to rise irrespective of what the RBA does … There has already been movement up.”

Australia’s wages grew at the slowest pace on record in the three months to September 2016, according to the latest Wage Price Index released by the Australian Bureau of Statistics (ABS).

And as a result Australia’s debt-to-income ratio is astronomical. The ratio of household debt to disposable income has almost tripled since 1988, from 64 per cent to 185 per cent, according to the latest AMP. NATSEM Income and Wealth report.

What this means is that many Australian households are highly indebted, thanks in large part to the property market, without the income growth to pay it down.

“The ratio of debt to income is as high as it’s ever been in Australia and there are some households that are very, very exposed,” Mr North said.

THE YOUNG AND RICH MOST AT RISK

This finding will come as a surprise: young affluent homeowners are the most at risk — it is not just a problem with struggling families on the urban fringe. When it comes to this segment of the market, around 70 per cent would be in difficulty with a 0.5 per cent or less rise. If rates were to hike 3 per cent, bringing them to around the long term average of 7 per cent, nine in ten young affluent homeowners would feel the pressure.

“It is not necessarily the ones you think would be caught. And that’s because they are actually more able to get the bigger mortgage because they’ve got the bigger income to support it.

“They have actually extended themselves very significantly to get that mortgage — they have bought in an area where the property prices are high, they have got a bigger mortgage, they have got a higher LVR [loan-to-valuation ratio] mortgage and they have also got lot of other commitments. They are usually the ones with high credit card debts and a lifestyle that is relatively affluent. They are not used to handling tight budgets and watching every dollar.”

And while the younger wealthy segment of the market being most at risk might not be of that much importance compared to other segments, Mr North said what is concerning is the intense focus on this market.

“Any household group that is under pressure is a problem for the broader economy because if these people are under pressure they are not going to be spending money on retail and the broader economy,” Mr North told news.com.au.

“The banks tend to focus in on what they feel are the lower risk segments and the young affluent sector has actually been quite a target for the lending community in the last 18 months. Be that investment properties or first time owner-occupied properties, my point is there is more risk in that particular sector than perhaps the industry recognises.”

TOUGHER HOME LOAN RESTRICTIONS NEEDED

Now an argument is mounting that Australian banks need to toughen up their approach to home lending.

“I think we have got a situation where the information that is being captured by the lenders is still not robust enough. I am seeing quite often lenders willing to lend what I would regard as relatively sporty bets … I’m questioning whether the underwriting standards are tight enough,” Mr North said.

This includes accepting financial help from relatives for a deposit, a growing trend among first home buyers.

“The other thing that I have discovered in my default analysis is that those who have got help from the ‘Bank of Mum and Dad’ to buy their first property are nearly twice as likely to end up in difficulty … It potentially opens them to more risk later because they haven’t had the discipline of saving.”

News.com.au contacted several banks for comment on whether they think a rethink of their underwriting standards is needed. Only one lender, Commonwealth Bank, agreed to comment, but remained vague on the topic.

“In line with our responsible lending commitments, we constantly review and monitor our loan portfolio to ensure we are maintaining our prudent lending standards and meeting our customers’ financial needs. Buffers and minimum floor rates are used when assessing loan serviceability so it is affordable for customers,” a CBA spokesman said in an emailed statement.

But Mr North said something needs to be done before we find ourselves in a property and economic downturn.

“I’m assuming that with the capital growth we have seen in the property market, it will allow people who get into significant difficulty to be able to get out, however, it’s the feedback concern that I’ve got.

“If you have got a lot of people in the one area struggling with the same situation, you might see property prices begin to slip. If we get the property price slip, and we get unemployment rising and interest rates rising at the same time, we have that perfect storm which would create quite a significant wave of difficulty.

“We need to be thinking now about how to deal with higher interest rates down the track. We can’t just say it will be fine because it won’t be,” he told news.com.au.