The RBA is 'closely monitoring' Australia's booming housing market as a possible intervention looms later this year

The regulatory hammer may have to come down if Australian property prices continue to rise. (Peter Rae, SMH)
  • The Reserve Bank of Australia (RBA) has revealed it is keeping a close eye on Australia’s property markets as prices rise and lending soars to new records.
  • While it “concluded that there were greater benefits for financial stability from a stronger economy”, forecasted growth could compel intervention in the market.
  • Unless JobKeeper helps suppress price growth, regulators could be forced to act, SQM Research founder Louis Christopher told Business Insider Australia.
  • Visit Business Insider Australia’s homepage for more stories.

The biggest question facing Australia’s frothy property market right now looks to be not if intervention is coming but when.

As property prices soar and major banks forecast two-year price growth in the realm of 20%, it’s a situation the Reserve Bank of Australia (RBA) says it is keeping an eye on.

Publishing the minutes on Tuesday, the central bank said that during its March meeting it “acknowledged the risks inherent in investors searching for yield in a low interest rate environment, including risks linked to higher leverage and asset prices, particularly in the housing market.”

Those risks are currently on full display. Each month in Australia, new lending records are being set, as homebuyers pour back into the market, spurred on by record low interest rates.

The growth of credit coupled with the level of competition for housing has translated unsurprisingly to higher prices, as Australians try to outdo each other at auction. Yet, on balance, the RBA says it is content with how things are progressing.

“The Board concluded that there were greater benefits for financial stability from a stronger economy, while acknowledging the importance of closely monitoring risks in asset markets,” it said.

By the RBA’s own estimation, the risks are not yet great enough to act upon, noting both that “lending standards remained sound and that it was important that they remain so in an environment of rising housing prices and low interest rates.”

As prices rise however, so does the risk that borrowers may be biting off more than they can chew.

After a similar dynamic sent New Zealand house prices flying by 19% last year, the RBA’s trans-Tasman counterpart was forced last month to introduce a string of new lending restrictions designed to stop prices spiralling higher.

Runaway debt could trigger a property intervention

While Australian property prices remain outside of the RBA’s remit, it has told the federal government that growing debt, a direct by-product of soaring values, remains a major concern.

Judging from the most recent data from regulator APRA, that risk is escalating. Figures shows that the number of Australian buyers who have borrowed more than six times their income has nearly doubled between March 2019 to more than 21,500. For the record, that doesn’t even include the last three months of lending.

If the rapid growth continues, it could see APRA step into the lending market as it did in 2015. Back then it was to clamp down on investors, but it’s just as likely to do the same for owner-occupiers, according to SQM Research founder Louis Christopher.

“While investors are beginning to come back in, APRA would be just as concerned, if not more concerned, about first home buyers getting themselves on the hook with mountains of debt that they’ve got no chance of servicing,” Christopher told Business Insider Australia.

“If thousands and thousands of first home buyers were to default, the damage would be quite substantial.”

Christopher suspects however that any intervention won’t come until “booming house prices become politically uncomfortable for the federal government”, adding that “we’re not there yet.”

While Canberra, the RBA and the prudential regulator appear reluctant to act right now, market momentum may eventually compel them.

Prices are only tipped to rise

There are plenty of reasons to indicate the market is only going to rise from here.

For one, the RBA has all but guaranteed it won’t raise interest rates for three or four years, assuring buyers they have years of lower mortgage repayments ahead of them.

At the same time, the federal government looks married to the idea of winding back responsible lending standards.

The one policy that looks like it could take some of the wind out of the market’s sails is the removal of JobKeeper at the end of the month.

“If the market starts to slide down in any way due to the end of JobKeeper, then I suspect we’re not going to see APRA intervene in the marketplace,” Christopher said.

If the market soldiers on however, it could force APRA’s hand in the second half of the year.

“I think they will not immediately go as the federal government and indeed the Reserve Bank of Australia right now are heavily reliant on housing construction to drive the economy out of recession,” Christopher said.

“The probabilities though go up in the third or fourth quarter of this calendar year if prices just keep on rising.”

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