Interest rates are as low as they have ever been in most advanced economies…
This shadow has created a difficult environment for savers and those managing savings. Perhaps at the risk of over-simplifying things, they have three basic choices:
1. They can leave the savings in the bank and earn zero (or less).
2. They can use the savings to purchase existing assets from other investors in the hope of earning a positive return.
3. They can use the savings to finance the development and creation of new assets, for example a new piece of capital equipment, a new building or some new intellectual property.
It is this third use of savings that is critical to the resumption of strong growth in the global economy.
When the crisis hit in 2008, the first of these three savings choices dominated…
[But] as we gradually climbed out of the crisis, attitudes to investing evolved. Faced with very low interest rates on safe assets and evidence that the global economy has been on a recovery track of sorts, investors have been prepared to move out along the risk spectrum and purchase existing assets as they search for yield. In response, the prices of these assets have risen again.
This rise in the prices of existing assets is understandable…
[However] it is this latter part of the transmission channel that is proving frustratingly slow in many countries. The strong demand for many existing assets has not yet generated a strong appetite for the creation of new assets. Many investors remain very cautious when considering funding business expansion and aggregate investment remains low. In response, central banks have felt that they have had no choice but to continue with very expansionary policies and, in some cases, to add yet further stimulus. The hope is that in so doing they will eventually induce a shift from the world of strong demand for existing assets to one in which there is strong demand for the new assets that will create the growth and jobs that are so badly needed.
It is in the housing market where the strong demand for existing assets is most evident. Many investors, including those in self-managed superannuation funds, have decided that investment in residential property is an attractive option, partly given the low level of interest rates. Prices have risen as a result…
The good news is that this increased demand for existing housing assets is translating into increased demand for new housing construction. This is a very welcome development. Investment in residential construction has increased by 9 per cent over the past year and further increases are expected…
[But] the judgment that we have reached over recent times is that at least some aspects of the housing market have become somewhat unbalanced and that this has generated some increase in overall risk.
The area that has attracted most attention is the very strong demand by investors to buy housing for the purposes of renting. Currently, loan approvals to investors buying properties to rent out account for nearly 45 per cent of total loan approvals, with most of the investment properties being existing properties. Perhaps not surprisingly, the biggest increases in housing prices have occurred in the city where investor demand has been strongest – namely Sydney. Overall, investor credit outstanding is growing at an annual rate of close to 10 per cent, around twice the rate of increase in household income. A fairly high and increasing share of these investor loans do not require the repayment of any principal during the life of the loan. And this is all occurring in an environment in which growth in rents has slowed and the ratio of housing prices to income is at the top end of the range experienced over the past decade or so.
Now as I said, one cannot draw conclusions with absolute confidence, but I contend that a reasonable interpretation of these events is that they are leading to some increase in overall risk… on average, recent loans are probably a bit more risky than those made earlier…
As has been well publicised, the members of the Council of Financial Regulators, including the Bank and APRA, have also held discussions regarding the merits of additional measures within the existing prudential framework. If risk has increased, then it might be appropriate to adjust one or more of the elements within that framework to reflect that change in risk… [That is] consideration of modest and sensible changes within the existing prudential framework.
As I have said, low rates have boosted asset prices globally, including in our own housing market. The judgement that the Reserve Bank Board has reached is that in Australia these low rates are entirely appropriate. They are required to assist in the necessary balancing of the Australian economy following the once-in-a-century boom in resources sector investment. This is especially so when the exchange rate has not been providing the degree of support that might normally have been expected. The low interest rates are helping boost construction activity and spending more broadly in the economy. This is the transmission mechanism at work.
By way of not frightening the horses, we're not proposing anything too draconian. We're happy with the current level of investment in real estate and we just don't want to see things get out of hand. Australians have a deep and abiding love affair with real estate, which is fine, and even commendable, but it is important that proper lending standards are maintained and the bank is working with APRA to ensure this continues.
By way of not frightening the horses, we're not proposing anything too draconian. We're happy with the current level of investment in real estate and we just don't want to see things get out of hand. Australians have a deep and abiding love affair with real estate, which is fine, and even commendable, but it is important that proper lending standards are maintained and the bank is working with APRA to ensure this continues.
You don't think our love affair with realestate has already gone too far, and perhaps rates were dropped to early ?
And from here we have little room to move on the downside with rates to help support things moving forward from here.
Dropping rates to record lows in 2011 has not stopped our unemployment recently reaching twelve year highs. How much effect do you really think further drops would achieve condisering banks will not move much lower, as we see in the US ,fed rates are 0.25%, but bank mortgage rates are in the 3.5-4.0 % range ?
So considering our achievable bank mortgage rates are already only within 0.5-1% of US mortgage rates, effectively our rates may as well already be at 0.25%. You could drop them by another 2%, but the most we would see from the bank would probably be 0.5%, maybe 1% at best.
You don't think our love affair with realestate has already gone too far, and perhaps rates were dropped to early ?
And from here we have little room to move on the downside with rates to help support things moving forward from here.
There is still room for additional policy stimulus if economic conditions deteriorate, and given the competitive nature of residential lending in the Australian banking sector, the Bank would expect any additional rate cuts to be passed on. I would politely remind you that the OCR currently sits at 2.5% and can be reduced if conditions worsen. The Bank has certainly not exhausted all of its available ammunition. By the way, it's pleasing to see a new generation of first home buyers taking advantage of low rates to gain a foothold in the property market. Australia is a wonderful country with a low crime rate, beautiful beaches, political and economic stability, and it's no wonder, in the Bank's view, that Australians must pay a little more for real estate than our international counterparts.
Macroprudential tightening is coming but what kind? In the course of a year, the Reserve Bank of Australia (RBA) has swung from a viewpoint that macroprudential is “dreaded” and the “latest fad” to an endorsement of doing something about the housing bubble that doesn’t involve raising interest rates. Throughout this time there have been two lines of debate of what kind of macroprudential might be used.
The first is requiring banks to list interest rate buffers within mortgage calculators, which would be an excellent approach, hitting all borrowers equally and immediately capping potential loan balances. But let’s not forget that the real problem in the market is investors, as Phil Lowe pointed out this week. This suggests something more specific for investors may be in the pipeline as well or alternatively, a perception given a credence by the RBA’s Malcolm Edey in his Parliamentary testimony a few weeks ago.
But, yesterday, the man in the real hot seat, Australian Prudential Authority (APRA) chairman Wayne Byers published the opening statement given to the Senate Standing Committee on Economics.
'That brings me to my second point responding to potential risks in the housing market in this way is not new. We see it as standard supervision. In the period from 2002 to 2004, for example, there was a similarly strong run-up in house prices, and similar concerns about higher risk lending and emerging imbalances. We’re doing now what we did then: collecting additional information, counselling the more aggressive lenders, and seeking assurances from Boards of our lenders that they are actively monitoring lending standards. We’re about to finalise guidance on what we see as sound mortgage lending practice, and we’ve conducted a comprehensive stress test of the largest lenders. The sources of risk are different this time around – last time we were focussed on low doc and no doc lending – but the response of higher supervisory intensity and regulatory requirements in the face of higher risk activity is not new. It is APRA doing its job.'
While this appears to hose down macroprudential limits it does not rule out either of the two approaches already mooted in the debate and discussed above. Stronger mortgage buffers are not interfering with the bank’s choices on risk taking. Raising capital requirements – recommended several years ago by Professor Ross Garnaut – does not do it either. Even if APRA was to raise capital requirements on specific types of loans, zero-interest for instance, this would not breach the covenant described by Mr Byers. He is only saying that regulators will not return to the pre-reform era practice of setting hard limits on any given form of lending.
All regulators have been consistent on this point throughout the discussion. Any macroprudential initiative will exist in the current broad framework of supervision not one of proscription, which is fine.
So, it is likely then that what we will see is some combination of the above two approaches. They might start together or graduate more slowly. But the one thing that all should bear in mind here is this: macroprudential in our current circumstances is MACROprudential. It is needed not to just mitigate building risks in the housing market but because slower housing will enable the RBA to do whatever it takes with the cash rate to lower the Australian dollar. If there was no pressure on the dollar, the RBA would simply raise the cash rate.
Therefore, whatever path is chosen, the high probability is it will continue to ramp up until house prices slow right down. My view is that, given the maniacal levels of investor activity in Sydney and Melbourne, both cities could see mortgage activity fall sharply and rate cuts would ensue in pursuit of a soft landing. A second possibility is that we see a more subtle slowing and the US raises its own interest rates sooner than expected – less likely given current bond market pricing – meaning macroprudential enables the RBA to hold rates at their current level for longer, managing a soft landing.
Either way, macroprudential is intended to end the housing boom and lower the the dollar.
There is still room for additional policy stimulus if economic conditions deteriorate, and given the competitive nature of residential lending in the Australian banking sector, the Bank would expect any additional rate cuts to be passed on. I would politely remind you that the OCR currently sits at 2.5% and can be reduced if conditions worsen. The Bank has certainly not exhausted all of its available ammunition. By the way, it's pleasing to see a new generation of first home buyers taking advantage of low rates to gain a foothold in the property market. Australia is a wonderful country with a low crime rate, beautiful beaches, political and economic stability, and it's no wonder, in the Bank's view, that Australians must pay a little more for real estate than our international counterparts.
We don't know how much the banks will pass on.You have no answer as to why mortgage rates here are near the same as US mortgage rates but yet their fed rate is near zero, why would they pass on more here, if we could get cheaper funding from overseas. You then mention further stimulus measures.
This is what I have said we will get eventually, but with our debt levels and prices way beyond US or Euro prices, I doubt it would have much effect. We have used just about every measure imaginable. More that the US by having negative gearing aswell. So all thats left is monetary stimulus,but we have seen how effective this is now overseas, doing nothing but overpumping stockmarkets, with our prices and debt levels where they are now, I doubt it would do much.
The problem even with MP is that house price declines are simply not going to happen. Even at today’s absurd prices you can go to any pub in Sydney and overhear the guys talking about how much their own houses are worth AND how they wish they’d bought that second or third IP. MP simply wont be sufficient to change the RE sentiment, all MP will do is to disadvantage First time buyers and shift even more housing stock into foreigner and investor hands.
In ALL markets for anything and everything sentiment changes before volume and price change, Sentiment is the first thing to change because it is the emotional embodiment of risk, so until the day comes that you can walk into any Sydney pub and over hear the guys sitting around the bar cursing about the IP they got talked into, the sentiment has not changed so the price direction will not change.
Now maybe we can manufacture an Aussie liquidity crises but I wouldn’t even count on that because IMHO too much manufacturing know-how has already left the country... unfortunately everyone else sees high RE prices as a blessing / wealth.
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy