The opening stanza in the Australian Prudential Regulation Authority’s “macro-prudential” campaign to cauterise any credit-fuelled housing bubble has arrived, as predicted by The Australian Financial Review.
APRA is anxious deposit-takers will relax lending standards to foster faster credit growth in a bid to maintain our banking system’s internationally high profitability. And it is concerned these decisions may be encouraged by the cheapest borrowing rates in history and a nascent housing boom.
House prices in Sydney are up 8.5 per cent in the first eight months of 2013 according to RP Data. Nationally, auction clearance rates are back to exuberant 2009 levels.
APRA doesn’t pull its punches, cautioning that “a prolonged period of low rates can lead to rising leverage and housing market pressures, with potential flow-on impacts on the credit quality of loan portfolios”.
It notably highlights that in New Zealand, Norway, Sweden and Switzerland, regulators have already adopted “pre-emptive measures” to force banks to “build up capital as imbalances in the credit (housing) market develops, which can then be used to help absorb potential future losses”. I expect APRA will inevitably follow suit.
Australia’s challenge is that families haven’t really deleveraged. In March the household debt-to-income ratio was 147.3 per cent, just below the pre-GFC peak of 153 per cent.
APRA also draws attention to a recent rise in high-risk lending: “since 2010 there’s been an increase in new lending at loan-to-value ratios above 90 per cent, particularly in the recent quarter”, it said.
Remarkably, almost 15 per cent of all approvals are now for borrowers with deposits of less than 10 per cent.
REGULATORS may look at imposing "speeding limits" on lending by banks to investors if the rally in property prices continues next year, says one of the nation's most prominent economists.
The resurgent housing market is getting attention from regulators, with the Australian Prudential Regulation Authority warning banks this week to maintain lending standards as competition to write mortgages heats up.
Investors have contributed 54 per cent of the bounce in mortgage lending in the past six months, according to UBS, pricing out first-home buyers…
“A pick-up in house prices is good, it might bring consumption on, but it also is something the Reserve Bank under the surface would be uncomfortable with,” Goldman Sachs chief economist for Australia Tim Toohey said.
Mr Toohey said the RBA would not want to see the acceleration in house prices extend for long. “It would be testing their limits of patience, I think, if six months on . . . we’re looking at mid-teens for house prices,” he said.
“Maybe the last tool in the kit they can deploy is to have another rethink about macro prudential rules to skew it towards new (housing) away from established, because it does seem this is actually a crisis in terms of the shortage of housing,” Mr Toohey said. “That is a big deal. The worst thing that can actually happen is the investors damage affordability so much you cannibalise the recovery.
“It probably wouldn’t be that popular but I do think we could have a scenario where you put speed limits on investor lending.”
Goldman Sach’s Australian chief economist, Tim Toohey, believes that the Australian Prudential Regulatory Authority (APRA) may look to impose macro-prudential curbs on investor morgage borrowing should Australian house price growth accelerate. : From the Weekend Australian :
Investors have contributed 54 per cent of the bounce in mortgage lending in the past six months, according to UBS, pricing out first-home buyers…
“A pick-up in house prices is good, it might bring consumption on, but it also is something the Reserve Bank under the surface would be uncomfortable with,” Goldman Sachs chief economist for Australia Tim Toohey said.
Mr Toohey said the RBA would not want to see the acceleration in house prices extend for long. “It would be testing their limits of patience, I think, if six months on . . . we’re looking at mid-teens for house prices,” he said…
“Maybe the last tool in the kit they can deploy is to have another rethink about macro prudential rules to skew it towards new (housing) away from established, because it does seem this is actually a crisis in terms of the shortage of housing,” Mr Toohey said. “That is a big deal. The worst thing that can actually happen is the investors damage affordability so much you cannibalise the recovery.
“It probably wouldn’t be that popular but I do think we could have a scenario where you put speed limits on investor lending…”
While I strongly disagree that “a pick-up in house prices is good”, since it increases imbalances in the economy, worsens affordability and inequity between young and old, as well as the asset rich and asset poor, I obviously strongly support macro-prudential curbs on higher risk mortgage lending, having lobbied for their implementation for a year.
If APRA and the RBA are likely to grow increasingly concerned with strengthening house prices on the back of strong investor demand, then why wait to implement reforms? As the latest APRA statistics show, investors accounted for 35.2% of mortgage in the June quarter of 2013, with 38.7% of total mortgages interest only. Given the proportion of high loan-to-value ratio lending is also up significantly, surely it would be more prudent for APRA/RBA to act now rather than wait until the damage is already done.
Moreover, if the RBA and APRA are concerned about investor speculation, why not lobby the Government to wind back tax negative gearing, which are largely responsible for the strong investor demand for housing, the overwhelming majority of which is in pre-existing dwellings?
The longer Australia’s financial regulators sit on their hands and let imbalances worsen, the greater the risk of financial instability when the tides goes back out. Better to take action now rather than after the horse has bolted. http://www.macrobusiness.com.au/2013/09/apra-to-curb-investor-loans/
Shadow was hopelessly wrong about the Gold Bull Market. What else is he wrong about?
The new government faces three issues that need resolution: housing prices, infrastructure and the future of the car industry.
As the Australian Prudential Regulation Authority (APRA) warned last week, low-interest rates carry their own risks. Banks need to be prudent, to ensure that lenders will be able to cope with higher interest rates. And APRA, the Reserve and the government need to be ready to intervene to head off a housing boom before it forces up interest rates before the rest of the economy is ready for them.
In the June quarter, APRA reports that 33 per cent of all home loans were for between 80 and 100 per cent of the purchase price - something now banned in New Zealand - and 39 per cent were interest-only loans. Next time it should tell us how many were both.
It's the sort of risky lending that fuels booms, which then end in busts. New Zealand has shown one way of heading off that problem. APRA hinted last week that it would prefer to make the banks hold more capital against this kind of lending. Whichever it chooses, it should act soon.
The reason Australians invest so much in housing, of course, is that the tax system pays them to. There are no official estimates of the cost of tax breaks to negatively geared landlords. My last estimate was that, on reasonable assumptions, it costs revenue roughly $5 billion a year. Subsidies to the car industry, by contrast, cost about $400 million a year.
OK, one in eight taxpayers is now negatively geared, so this government will not remove that tax break. But if Hockey wants to help the Reserve keep interest rates low, he should contribute something to help it head off the housing price boom that could force it to raise rates before it wants to.
One option would be simply to reiterate that when the government's tax inquiry gets to work, all options will be on the table, including a fresh look at negative gearing. It's just a warning shot that would help restrain the ''irrational exuberance'' of home buyers.
Maybe you could ask Mr goldbullion over at macrobusiness to explain it to ya Veritas. I/O has tax advantages that encourages its use among Mr and Mrs sensible investor.
That's pretty lame, and you dodge the whole issue raised, which is that the buyers using IO loans were expecting quick capital gains, that as we have seen in recent years, never materialized. IO loans are not an investment tool, they are a speculation tool that allows yield to cover mortgage repayments. It's why so many of the Land Lords here can boast that their mortgages are covered. They are, but many of them, like the Queensland buyers, have gone backward equity wise in the process. It was a pure gamble that hasn't paid off.
If APRA does put restraints on investment borrowing the market will surely tank because it is investors, and ONLY investors, that have thus far kept the leaky boat afloat.
Quote:
Investors have contributed 54 per cent of the bounce in mortgage lending in the past six months, according to UBS,
After a bubble has burst, no one denies that it existed. But before it does, the popular refrain is that though bubbles existed elsewhere in the world, “there’s no bubble here”. So housing bubbles are admitted to have existed in Japan, the USA, Spain and Ireland – because they’ve already burst.
There was always going to be a huge bust in Australian property, a crash, call it what you like. We kicked the can down the road by sucking hundreds of thousands of ordinary workers into believing they could be property gurus, wealthy elitist landlords. In hindsight it was obvious, all the changes that were made in Australian law and banking and the media, all designed to shepard the flocks into the slaughter house. A great big decade long song and dance show, that was all it was. The only winners were the banks and now it's over! Has been for years but the sheep holding the property wont admit defeat, they just hang on by the skin of their teeth and dream of booms that will never come in their lifetimes.
The Reserve Bank has sent Australia's banks a blunt message not to lower lending standards, urging the sector to behave cautiously while official interest rates are at their lowest level in more than half a century.
With debate raging over the resurgent housing market, minutes from this month's Reserve Bank board meeting show members discussed the risks posed by very cheap credit before leaving the cash rate unchanged at 2.5 per cent.
The Reserve also revealed it was closely monitoring the growing trend of borrowing to invest in real estate through do-it-yourself retirement funds.
''In the current environment of low interest rates and slow credit growth, members agreed that it was especially important that banks maintained prudent lending standards,'' said the minutes, published on Tuesday.
The central bank also saw the trend towards geared property investment in the $500 billion self-managed super sector as a potential problem as an area in which ''households could be starting to take some risk with their finances; members noted that this development would be closely monitored by bank staff''.
While the RBA said Australia's financial system was in good health, the comments are likely to fuel the debate over the housing market.
With Sydney auction clearance rates at their highest in a decade and some analysts predicting house price gains of 10 per cent or more this year, real estate is emerging as a key concern for regulators.
HSBC chief economist Paul Bloxham said the booming housing market was likely to influence the central bank's decisions from now on. ''It's going to be one of the possible constraints for the RBA to deliver further rate cuts,'' he said.
Mr Bloxham, a former RBA economist, predicted continuing house price growth in months ahead as the full effects of record low interest rates were felt.
''We are at the early stages of a housing boom,'' he said. ''I would not be surprised if house prices pick up to double-digit rates into the early stages of next year.''
The two regulators – RBA and APRA CANNOT regulate supply of housing.
All they can do is influence availability and cost of credit (the former via interest rates, the latter via entity-level capital requirements).
Accordingly, all RBA and APRA can do is assess whether borrowers are:
a) taking out loans on prudent terms b) have sufficient capacity to repay c) financial system remains sound
If the price growth (and increase in price as a multiple of household income) is based on a change in consumer preferences, say because people just VALUE housing relatively more than in the past, then who are the RBA and APRA to stand in the way? No rules are being broken.
Ultimately, if RBA and APRA are satisfied the financial system, individual entities, and general conduct of lending within the system remains sound, then their hands are (largely) tied.
It is the Federal Government that sets policy and should be thinking about availability of housing at reasonable cost/quality for their citizens. They should be addressing supply issues ASAP.
NB: I am playing devil’s advocate a little here. I do actually see a role for the regulators as ‘citizens of good conscience’ regardless of what their specific mandates may be.
I’ll also add:
1) Yes, I think house prices are at ridiculous levels. 2) I think bank lending has *mostly* remained prudent (I believe debt tends to be held by wealthier households so don’t expect defaults to necessarily skyrocket) 3) I still believe prices can fall in the absence of high levels of defaults. It simply requires a reset/adjustment of expectations.
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