Money & Markets | opinion

Measures to cool Australia's housing market have worked. Now to find out if they cause a whole set of other problems

William West/AFP/Getty Images
  • Tighter lending restrictions have seen Australian housing investor credit growth slow to the lowest level on record.
  • The sharp slowdown has contributed to recent declines in Australian home prices, especially in Sydney and Melbourne.
  • While this is reducing risks in the housing market, it carries the potential to create even larger risks for the Australian economy.

In the past it was interest rates increases that usually led to a slowdown, and in some instances downturns, in Australia’s housing market.

When they hit a high enough point, a rate rise would crimp demand, leading to a slowdown or fall, in prices.

However, that’s not been the case recently.

Home prices are now falling in Australia, even with official interest rates from the Reserve Bank of Australia (RBA) sitting at the lowest level on record after a steady period of cuts.

So at least on that factor, this time it’s different.

According to latest data from CoreLogic, Australian home prices fell 0.4% in the year to May in weighted terms, largely reflecting price declines in Sydney over the year, as well as pronounced slowdown in Melbourne.

As Australia’s largest and most expensive housing markets, it helps explain why the median national price is falling, masking pockets of modest strength in some smaller capitals and regional areas.

While affordability constraints, weak household income growth, small out-of-cycle mortgage rate increases and a decline in foreign investor activity have contributed to the price pullback at the margin, the main factor behind the latest downturn has been a tightening in lending standards.

Macroprudential measures, as they are known, have already left an impact on Australia’s housing market.

Just take a look at this excellent chart from UBS for evidence. It shows Australian housing credit growth on a year-end basis going back to 2006. UBS has annotated the chart to show the impact of macroprudential restrictions introduced by APRA, Australia’s Banking regulator, over the past few years.

UBS

The first round of restrictions — a 10% annual cap on housing investor credit growth — was introduced in December 2014.

It saw investor credit growth slow sharply in 2015 and early 2016, leading to a moderation in dwelling prices across the country.

However, after twin interest rate cuts delivered by the Reserve Bank of Australia (RBA) in 2016, which were followed by a sharp pickup in prices and investor activity, APRA announced in early 2017 that it would cap interest-only mortgage lending — often favoured by investors — to just 30% of all new housing debt.

Like the cap on annual investor credit growth before it, this too has led to a steep deceleration in investor growth.

According to data from the RBA, investor credit growth — the balance of outstanding housing loans issued to investors — was unchanged in May, the weakest result on record.

Along with prior weakness, that saw annual investor credit growth slump to just 2%, also the lowest level on record.

This pullback, reflecting both a drop in investor lending along with some interest-only borrowers being forced to switch to principal and interest repayments, has left its mark on Australian home prices, especially in Sydney and Melbourne, those markets previously favoured by investors.

With APRA instructing lenders to limit lending to highly-indebted and high loan-to-income borrowers earlier this year, the recent trends in both credit and prices could last for some time yet, particularly as growth in household debt continues to outpace that of incomes.

Clearly, macroproduential restrictions have done what they were set out to do — reduce riskier forms of lending and to slow rapid growth in house prices, hence lessen financial stability risks associated with the housing market.

One has to wonder why they weren’t reduced earlier.

However, while the effect of macroprudential restrictions often diminishes over time, as it may well do on this occasion, it does beg the question: in attempting to reduce risks in the housing market, could it create additional risks for the broader Australian economy?

Only this week, data from the ABS revealed gross Australian household wealth fell by the largest amount since 2011 in early 2018, albeit from record highs in the prior quarter.

This was driven by declining home prices, and completely offset gains from other investments. With household debt levels increasing over the same period, it saw Australia’s household debt-to-income ratio hit a record-high 190%.

At a period when household income growth remains weak, and household wealth is starting to fall, it underscores why some are becoming concerned about the outlook for household spending.

Australia’s household savings ratio is already incredibly low, reflecting that many have been diverting a greater proportion of their income away from savings in order to sustain spending levels, often to purchase necessities rather than luxuries.

Although Australian labour market conditions remain firm, providing support to spending as a greater number of people are employed, there’s not much of buffer for households to use in the absence of an unexpected pickup in income growth, dis-saving or borrowing to consume.

With consumption the largest part of Australian GDP at a shade under 60%, it’s understandable why some are concerned that further declines in home prices — seen as a highly-likely scenario among most forecasters — could lead to even weaker spending levels.

If that does eventuate, it will create downside risks for economic growth, and as a consequence employment, wages and inflation.

Given household debt sits at the highest level on record, and interest rates the lowest, it’s easy to see why so many are watching the housing market at present.

It’s not all that hard to see that in attempting to reduce risks in the housing market, it could create even greater risks for the economy.

Listen in to the latest episode of our economics podcast, Devils and Details, with a focus on property prices below

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