Macroprudential policy considered for Australia, similar to Canada and New Zealand; Monetary authorities forced to keep interest rates low despite overheating property markets
Tweet Topic Started: 29 Jul 2013, 11:01 AM (2,498 Views)
Financial regulators in Australia may be leaning toward macroprudential policy as a credible option if the speculation of one Financial Review columnist is on the money.
Alan Mitchell, economics editor of the AFR, wrote today that "Australia could then find itself heading into the place already occupied by Canada and New Zealand, where the monetary authorities have been forced to keep interest rates low despite overheating the property markets."
"The Canadians and the New Zealanders are showing politicians across the English-speaking world that you can control a housing boom without increasing interest rates."
The Australian Prudential Regulation Authority has in the recent past questioned the utility of macro-prudential tools in banking regulation.
Charles Littrell, executive general manager at APRA, said in March that "in the particular context of macro-prudential supervision, we see several threats to good supervision emanating from an overly rules-based approach."
Littrell said that "implementing macro-prudential supervision in many national jurisdictions runs the risk of the central bank or the finance ministry telling the prudential regulator how to use the regulator's tools, even when the regulator doesn't necessarily want to use them in that way.
"There are a great many problems with such an approach. The list starts with a resultant fuzziness in responsibility for prudential outcomes, continuing through to the potential to impair relationships between the key public sector agencies, and finishing with a reduction in confidence on the part of the prudential regulator.
"In the Australian context, these would be disastrous results."
Australia could be heading on Canada and New Zealand’s path to keep interest rates low.'
The Reserve Bank could find itself having to cut interests rates to support demand against the pressure of a strong exchange rate, the strength of the housing market notwithstanding.
Australia could then find itself heading into the place already occupied by Canada and New Zealand, where the monetary authorities have been forced to keep interest rates low despite overheating the property markets.
Both countries have turned to macro-prudential policies, in which the long-standing prudential regulations are adjusted to protect the financial system against the risks of asset price bubbles.
In Canada, a housing boom has been an unwelcome by-product of the low interest rates needed to support growth in the face of fiscal consolidation and a strong exchange rate boosted by safe-haven capital inflows. The Canadian authorities have responded by using prudential regulations to curb the housing boom.
The International Monetary Fund’s evaluation of Canada’s experience suggests that, after a period of trial and error, the measures have been effective.
In particular the third and fourth rounds in 2011 and 2012 appear to have helped curb the growth of house prices, residential investment and mortgage credit.
The IMF’s analysis of the individual measures suggests that tightening LVR ratios for new mortgages and for refinancing loans has had the greatest impact.
LVR caps help bankers, not borrowers. We have LVR limits (albeit small ones) at the moment which didn’t prevent an unprecedented boom in mortgage lending. So regardless of where the ratio is set, valuations are open to manipulation by bankers’ flow of credit. Nothing good will come of LVR caps.
What we need is loan to income caps so bankers can’t steal an increasing share of the customer’s wallet. If anyone really wanted to improve lending standard, mortgage outgoings should be restricted to maximum of say 35% of the customer’s income. This would prevent the unproductive credit growth and limit it to the natural growth in wages.
Better still, why do we need regulations at all. The best form of regulation is capitalism. If you let these bankers/the reserve bank and borrowers fail without bailing them out, lending standards will become a lot tighter overnight. Our biggest problem is the systemic corruption of government and regulators who are paid off to uphold a failed banking system which extracts wealth from the public without law and order (or only those to protect bankers’ position).
LVR caps help bankers, not borrowers. We have LVR limits (albeit small ones) at the moment which didn’t prevent an unprecedented boom in mortgage lending. So regardless of where the ratio is set, valuations are open to manipulation by bankers’ flow of credit. Nothing good will come of LVR caps.
What we need is loan to income caps so bankers can’t steal an increasing share of the customer’s wallet. If anyone really wanted to improve lending standard, mortgage outgoings should be restricted to maximum of say 35% of the customer’s income. This would prevent the unproductive credit growth and limit it to the natural growth in wages.
Better still, why do we need regulations at all. The best form of regulation is capitalism. If you let these bankers/the reserve bank and borrowers fail without bailing them out, lending standards will become a lot tighter overnight. Our biggest problem is the systemic corruption of government and regulators who are paid off to uphold a failed banking system which extracts wealth from the public without law and order (or only those to protect bankers’ position).
It's the dollar value of the loan amount that gets borrowers into trouble, not the LVR. The LVR does protect banks, or more correctly Mortgage Insurers, as you say it doesn't protect the borrower from themselves.
But dollar amount caps do protect both the borrowers and the banks.
there are actually a whole series of caps on LVR's and dollar value amounts in place at the moment, all imposed by the mortgage insurers, it's not as though someone can get 95% of a $2M house - it can't happen. Nor can you borrow more than $450K for a house in the sticks on a high LVR - that also can't happen, in some areas the max is $300K. Areas are categorised depending on the local population size. Large cities are Cat 1 and out in the sticks is Cat 3 or "other" with decent rural towns in the middle at Cat 2.
Australia could be heading on Canada and New Zealand’s path to keep interest rates low.'
The Reserve Bank could find itself having to cut interests rates to support demand against the pressure of a strong exchange rate, the strength of the housing market notwithstanding.
Australia could then find itself heading into the place already occupied by Canada and New Zealand, where the monetary authorities have been forced to keep interest rates low despite overheating the property markets.
Both countries have turned to macro-prudential policies, in which the long-standing prudential regulations are adjusted to protect the financial system against the risks of asset price bubbles.
In Canada, a housing boom has been an unwelcome by-product of the low interest rates needed to support growth in the face of fiscal consolidation and a strong exchange rate boosted by safe-haven capital inflows.
Im surprised this doesn't get more airplay..
APF - a place where serious people don't take themselves too seriously. There's nothing else like it.
Legislated LVR limits don't help first home buyers other than those from wealthy families.
And more importantly they don't help property speculators given the potential for limiting new entrants.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
"In Canada, a housing boom has been an unwelcome by-product..." This is where Australia is different. In Australia we have a housing boom which has been welcomed by the government, vested interests and all property owners, and in fact it has been welcomed so much that nobody wants to pop the bubble.
The only ones who don't want this property bubble are the new entrants, and nobody cares about them because subsidised investors and foreign investors fill the void, and in any case, they are willing to pay so much more for property, so they are welcomed even more.
Nobody cares if people want to speculate their money away and give a bite to the banks, but the flow-down from this to normal housing is really tragic. The share market is the time honoured way for idiots to lose their money – do they really have to bring it to housing as well. I am massively pissed off that my taxes are used to subsidise this rubbish through negative gearing and CGT breaks and at the same time families that just want a house are getting absolutely screwed into private debt hell. All politicians should declare their negative gearing positions – bunch of lying, smarmy, party worms.
What we need is loan to income caps so bankers can’t steal an increasing share of the customer’s wallet. If anyone really wanted to improve lending standard, mortgage outgoings should be restricted to maximum of say 35% of the customer’s income. This would prevent the unproductive credit growth and limit it to the natural growth in wages.
I totally disagree with this idea. You cannot define a number like that and say it should apply to all people! Is 35% of income for someone earning $40k with a non-working wife and 3 kids, vs 35% of income for an Sydney exec on $200k+ with a professional wife earning $150k, and maybe no kids yet? Of course it's not. So easy to show this to be a really stupid, financially regressive idea.
LVR caps I object to less, as at least they would remove some systemic risk from the system, and could restrict price growth to some extent by limiting FHB entrants and resulting price explosions that we see if too many of them try to pile into the limited-supply cities at the same time. However, as pointed out, FHBs themselves may not like this, as they will be forced to save bigger deposits.
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