- House prices are now falling in many Australian cities, coinciding with the introduction of tighter lending standards early last year
- Recent commentary from the RBA, APRA and Treasurer Scott Morrison have seen some speculate that these restrictions may be watered down in the period ahead
- Capital Economics says that’s unlikely to arrive this year with “prices at the national level broadly moving sideways”
After years of strong, predominantly Sydney and Melbourne-led growth, Australian house prices have softened noticeably over recent months, raising concerns what impact it could have on household spending, residential construction and, as a consequence of both, the broader Australian economy.
Much of the recent slowdown has come courtesy of tighter lending restrictions from Australia’s banking regulator, APRA, limiting interest-only lending to 30% of total new mortgage lending lending in March last year.
On top of a 10% annual cap on investor credit growth introduced in late 2014, it’s had a meaningful impact on the housing market, especially in the eastern states.
Prices are now going backwards in many Australian cities as lending to investors slows.
Given the headwinds posed to the economy from a prolonged period of house price weakness, it has some wondering whether APRA’s tougher restrictions may be watered down or completely unwound at some point this year, especially given recent commentary from policymakers expressing confidence that they’ve already helped to curb what were growing financial stability risks.
As Paul Dales, Chief Australia and New Zealand Economist at Capital Economics points out, Australian Treasurer Scott Morrison, APRA Chair Wayne Byres and Reserve Bank of Australia Governor Philip Lowe have all hinted that a relaxation of lending restrictions could occur should current trends be maintained.
“In an interview with the AFR at the start of February, Treasurer Scott Morrison appeared to flag up the possibility that the lending restrictions could be eased when he said they were ‘completely malleable,'” says Dales.
“And in his testimony on Friday, RBA Governor Philip Lowe said ‘there has been some containment of the build-up of risk in this area”.
“Finally, in a speech last week, APRA Chairman Wayne Byres said that these measures were ‘temporary’ and that ‘our interventions have served their purpose.'”
As Dales rightfully notes, with the exception of ASIC, three quarters of Australia’s Council of Financial Regulators appear to be suggesting that the restrictions may be on borrowed time.
However, in his opinion, while restrictions could be unwound at some point in the future, it’s unlikely to occur this year.
“With a Federal election required before May 2019, we suspect that Morrison’s view is based on politics rather than financial stability,” he says.
“And other comments by both the RBA and APRA pour cold water on the idea that the restrictions will be relaxed.”
Given that household leverage is still increasing as borrowing outpaces incomes growth, Dales says it seems very unlikely that lending limitations will be eased soon, adding that if they were, “they would be replaced by other more permanent restrictions anyway”.
And given that the RBA appears reluctant to cut interest rates further given concern it could lead to a similar outcome to that seen in 2016 when house price growth accelerated sharply as the cash rate was reduced to 1.5%, Dales says it is “hard to think of many reasons why the housing market could strengthen this year”.
“Our view remains that the housing market will be weak for all of this year, with prices at the national level broadly moving sideways,” he says.
“And the risks to our housing view are stacked to the downside.”