The decision by the banking regulator to scrap the 7% serviceability testing regime will give housing-exposed ASX stocks an extra tailwind that could add a few hundred billion to the $5.5 trillion residential market.
Analysis by UBS and reported in the Australian Financial Review found that households could increase their borrowing capacity by as much as 14% under Australian Prudential Regulation Authority's (APRA) relaxed ruling.
This is a further win for homebuilders like the Stockland Corporation Ltd (ASX: SGP) share price and Mirvac Group (ASX: MGR) share price, as well as building material suppliers CSR Limited (ASX CSR) and Boral Limited (BLD).
Triple boost for the sector
These stocks have already been finding favour with investors following the Reserve Bank of Australia's back-to-back interest rate cut that pushed the official cash rate to a new record low of 1%.
The passing of the Morrison Government's $158 billion tax cuts will also improve mortgagees' capacity to borrow as banks factor this into their calculations when assessing home loans.
But its APRA's decision to swap the 7% ratio for a 250-basis point over the current interest rate test that will prove to be far more significant.
Under the old rule, banks had to ensure would-be borrowers could continue to service their loans if the interest rate surged to 7%. This prompted lenders like the Australia and New Zealand Banking Group (ASX: ANZ) to warn that it had to reject many loan applications.
How much more can home buyers borrow?
However, banks are now only required to test if consumers can service a loan that is 2.5 percentage points over the rate they are trying to borrow at. This means those applying for a mortgage at a 3.5% rate will be tested against a 6% benchmark instead.
A couple with a combined annual income of $200,000 will have an extra $150,000 borrowing capacity while a household with half that income can borrow an additional $67,000, according to UBS.
This is not only good news for homebuilders but also for our big banks, although their profit margins continue to be under pressure from interest rate cuts.
But at least their top-line should fare better if the rule change stimulates demand and the lenders won't have to reject so many applications.
Foolish takeaway
This won't make banks stocks a "screaming buy" but I have more confidence in them holding their current dividend payments – and that's really all investors should be worried about at this stage.
Bank stocks don't need growth to stay on the front foot as their share prices are unlikely to suffer a painful correction when they can generate a yield of over 6% with franking credits in a record low rate environment.
