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 (2,499 Views)
"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.
Housing isn't in a bubble, the yields are too high. If property doubles from where it is now, without significant changes in rent, then it will be in a bubble.
By comparison, Tokyo property got to a point where the price to rent ratio was about 15 times higher than central Sydney is now.
A CONSULTANCY founded by former chief risk experts of two major banks has warned macro-prudential rules to cool house prices may restrict small businesses' already strained access to credit.
Ahead of the Reserve Bank's Financial Stability Review today, former Bank of Queensland chief risk officer Bruce Auty said "it's way too early" for the banks to be getting nervous about the rise in house prices.
"The fact things have started to move doesn't necessarily say there's a bubble," Mr Auty said.
His view echoes those of RBA assistant governor Malcolm Edey who last week said concerns about a housing bubble were "unrealistically alarmist", with house prices up about 7 per cent from their trough mid-last year.
The RBA's review out today may shed further light on its position after recently warning banks to maintain lending standards and that it was monitoring self-managed superannuation funds' increasing interest in property.
John Laker, head of the Australian Prudential Regulation Authority, last week said the regulators would be willing to use macro-prudential rules if needed. His remarks came after new rules were announced in New Zealand capping the amount of lending the banks can do at high loan-to-valuation ratios.
Mr Auty said the macro-prudential rules in NZ would hit new homeowners rather than investors who are driving growth in house prices in Australia. He said LVR rules would restrict the access to credit of young owners of small-to-medium businesses, given the banks typically lent to SMEs with security over houses.
Mr Auty said SMEs were getting squeezed for credit and added the financial system inquiry should study the issue, saying tax relief might be needed to encourage the banks to lend more.
"The younger generation of business owners are far less likely to have a residential mortgage to support any business debt they need and they're just going to get squeezed out of that market, the same way as they've been squeezed out of the housing market," he said.
"These sort of things can stifle innovation as well. If you can't get past first base it's a bit hard to push your good ideas out there."
A CONSULTANCY founded by former chief risk experts of two major banks has warned macro-prudential rules to cool house prices may restrict small businesses' already strained access to credit.
"The younger generation of business owners are far less likely to have a residential mortgage to support any business debt they need and they're just going to get squeezed out of that market, the same way as they've been squeezed out of the housing market," he said.
They won't get a business loan of any size without security. Australian banks are bricks and mortar lenders.
There is a wonderful opening for a structured process to put venture capitalists and equity partners together with fledgling business ventures, but we certainly don't have it in Australia yet.
Any expressed market opinion is my own and is not to be taken as financial advice
Up to 8000 families, couples and individuals trying to get into their first home will be stymied by the Reserve Bank's new lending restrictions, Finance Minister Bill English has acknowledged.
But Labour finance spokesman David Parker says the tally is probably even higher than that and Aucklanders will be hardest hit.
Mortgage brokers are working around the clock trying to process as many pre-approved loans as possible to reduce the number of people who will miss out.
The political argument over the Reserve Bank's new limits on lending to home buyers with deposits of less than 20 per cent continued yesterday as Mr Parker asked Mr English how many first-home buyers in Auckland would be excluded from the market.
Mr English said no estimates had been given on the numbers excluded from Auckland or any other market.
But the Reserve Bank had advised him that of the 20,000 to 30,000 first-home buyers each year, 13,000 to 19,000 obtained a high loan-to-value ratio (LVR) loan.
Under the Reserve Bank's new rules, which allow commercial banks to make only 10 per cent of their new residential mortgage lending to buyers borrowing more than 80 per cent of the value of the property, 12,000 of those would still get a loan, Mr English told Parliament.
"The remaining 6000 to 8000 will make the choice of looking at a cheaper property or delaying their purchase while they save a higher deposit."
Mr English said the numbers were difficult to estimate, and didn't take into account the Government's policies in support of first-home buyers.
"What shuts them out of the market in the long run is a shortage of houses to buy, which is their bigger problem right now, or high interest rates," he told the Herald later.
Mr Parker said the figures revealed the loan limits would have "a significant effect on first-home buyers".
He also said the Reserve Bank's estimate of up to 8000 first-home buyers being affected was not necessarily accurate.
"I suspect the number's higher than that. This is going to bite hardest in Auckland where a third of New Zealand lives and where it's hardest to get a deposit of more than 20 per cent because house prices are so high."
Mortgage broker Bruce Patten,of Loan Market in Auckland, said the government estimate sounded accurate.
The industry was predicting nearly a fifth of low-deposit borrowers would be locked out.
"Whatever the number is, it's basically 15 to 20 per cent of the market that will be removed, so whatever way you look at it that's a significant chunk of people that could be buying a property that won't be able to."
The policy, in effect from October 1, has already hit some first-home buyers - ASB Bank this week cancelled pre-approvals for low-equity home loans from October 4.
Credit bureau Veda's managing director John Roberts said the company had seen a surge in mortgage inquiries from younger and most likely first-home buyers since the loan limits were announced.
Property booms can get out of hand. The best defence is to curb the upswing before it turns into an unsustainable boom with speculators pushing up prices as they chase the capital gains being generated by other speculators chasing capital gains.
State governments, including the late and unlamented Labor government in NSW, have also done their bit to make the housing recovery less bubble-prone. All the unpopular rezoning forced through by Labor has added to the effective land supply, as has its spending on public transport infrastructure. The O’Farrell Coalition government is building on that, with considerably more political skill.
But it is a strong rebound and, by the usual calculation, there is a lot of pent up demand, especially in Sydney. Lending to investors, including the SMSFs, is picking up strongly, and if prices continue to accelerate at their current rate, we soon will be entering boom territory.
If things look like they are getting out of hand, the RBA can edge up its monetary policy interest rate, although that would adversely affect non-mining business investment, which the bank wants to encourage. Alternatively, it and APRA could dampen the market with so-called macroprudential policy. The New Zealanders have already done this by limiting the proportion of high loan-to-valuation loans made by banks.
Something like that may yet save a few lump sums and spare the economy a patch of grief.
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