Most housing investor debt is owed by high-income households with the ability to service their payments when property price growth moderates, the Reserve Bank says.
Despite concern that the household debt-to-income ratio is moving beyond its already high level of 150 per cent, a breakdown of investors shows a more nuanced picture.
The Reserve Bank analysed the types of households and the ages of the growing crop of housing investors and found it was the highest-income households that owed most (60 per cent) of the total investor housing debt.
These investors were "fairly well placed to service their debt" and "typically (used) less than 30 per cent of their income to service their total property debt", the central bank found in its biannual Financial Stability Review, released on Wednesday.
RP Data senior analyst Cameron Kusher said it was typically higher-net worth individuals who chose to invest.
"This group is in a better position to cope in the event of a downturn."
In the report, the Reserve Bank said it had found no signs of reckless lending but it was actively examining the use of credit controls in an attempt to calm the market.
The central bank warned that "the composition of housing and mortgage markets is becoming unbalanced, with new lending to investors being out of proportion to rental housing's share of the housing stock".
The warnings are effectively aimed at investors with lower incomes, or ready access to liquid assets, who have rushed into the hot inner-city Melbourne and Sydney markets without considering the impact of slower price growth.
One in 10 Australians aged over 15 is now a property investor and those investors are increasingly using negative gearing.
Older Australians are rushing to invest in property, with a jump in the number of investors who are aged 60-plus.
"This older group now makes up one in five property investors.
The increase in property investment has come as investors seek assets with higher returns and with the Reserve Bank keeping it's cash rate a record low of 2.5 per cent for 14 consecutive months.
"The (Reserve Bank's) concern is you're seeing a lot of investors in the market treating property like a short-term asset," Mr Kusher said.
"It's a non-liquid asset, and the concern is what happens once the price growth isn't there or equity market picks up?
" Interest rates are low, so if you keep your money in the bank you're not making a return.
"At the moment, when you look at 16 per cent growth in Sydney property prices and 11.5 per cent in Melbourne, it's hard to find anything to compete with that."
The Reserve Bank of Australia’s plans for credit rationing have sent investors in the banks scuttling for cover. But the banks themselves are keeping quiet as they await details of how the controls, expected to target property investors, will work.
The prospect of credit rationing comes as a former senior economist at the central bank said the RBA miscalculated a predictable surge in investor-driven demand for housing.
“They underestimated how strong the investor pulse would be and I suspect they miscalculated how powerful the search for yield is in the current global environment,” said Jeremy Lawson, who is global chief economist of the $460 billion British fund manager, Standard Life.
“It was not mendacious – it was just an underestimate of how these dynamics would play out. But once housing imbalances begin they usually prove quite difficult to rein in.”
So-called macroprudential credit controls were flagged in the RBA’s Financial Stability Review on Wednesday. Experts believe the RBA will work with the Australian Prudential Regulation Authority to boost the minimum interest rate assumptions banks use when approving borrowers for new investor loans. Most lenders currently apply 2-to-2.5 per cent buffers over borrowing rates, which remain below 5 per cent.
‘The critical thing is that APRA has a lot of tools at its disposal,” said one banker who declined to be named. ‘The thing that APRA would typically do is say ‘We want you to crack down on investor loans. If an investor has three or four investment properties, we want you to toughen the tests of loan serviceability. Or say if you now factor in a fall in the property value of 10 per cent, we now want you to make it 15 per cent.’”
Regulators could also require banks to increase the amount of capital held against particular types of loans, including those made to investors to buy property in the hot markets of Sydney or Melbourne, or interest-only loans, which now account for about 30 per cent of new approvals. Hockey wants targeted controls
Treasurer Joe Hockey has said he wants credit controls to be “targeted” – suggesting it might be limited to investor loans, as this segment of the market has given the RBA most concern.
Mr Lawson believes the housing market is between 20 and 30 per cent overvalued and presents the RBA and the Australian Prudential Regulation Authority with a “genuine test”.
“If they can manage to successfully deliver a smooth landing after the commodities super-cycle they will deserve all the plaudits they get.”
Not many are I would think. I couldn't count the number of tradesmen I talked to over the past 5 years who had bought multiple properties. These weren't mature men either, they were mostly in their 30's and early 40's, some in their 20's. Many would be on the bones of their backsides now with the construction slowdown. A lot of default ahead...
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