Here's another way to cool Australia's booming east coast housing market

Photo: William West/AFP/Getty Images

Housing is at the forefront of many Australians minds in early 2017.

Faced with skyrocketing price growth in Sydney and Melbourne, Australia’s largest and most expensive cities, much of the recent debate has concentrated on the role of housing investors in driving prices higher.

In January, the ABS said that the value of investor lending surged by 4.2% to $13.784 billion, leaving it up 27.5% on the levels of a year earlier.

Investor housing finance has now risen in seven of the past nine months, with the January figure the highest reported since May 2015.

In separate data released by Reserve Bank of Australia (RBA) in February, the bank said that the investor housing credit grew by 6.6% in the 12 months to January, leaving the level of outstanding investor loans at $572.2 billion, the highest level on record.

Corresponding with the lift in investor housing finance, auction clearance rates and house prices in Sydney and Melbourne — favoured markets for investors in the past — have also pushed higher, fueling the debate over their involvement in lessening housing affordability further.

According to preliminary data released by CoreLogic over the weekend, Sydney and Melbourne both recorded clearance rates in excess of 83% last week, rising further on the already lofty levels reported in the past few months.

That strength has coincided with strong growth in dwelling prices in both cities over the past year, rising by over 18% in Sydney and by more than 14% in Melbourne, according to CoreLogic’s separate capital city house price index.

So investor housing credit is accelerating quickly, as are clearance rates and house prices. And, as a consequence, affordability for prospective first time buyers continues to deteriorate.

It’s little wonder why the debate over housing affordability, and ways to improve it, has dominated political headlines for much of this year.

Scrapping or capping negative gearing concessions for housing investors has been doing the rounds, as has potentially reducing capital gains concessions on investment properties.

And that’s just scratching the surface with a variety of other measures such as eliminating or reducing stamp duty for first home buyers, public-private partnerships to reduce housing costs, making interest payments for owner-occupiers housing loans deductible for personal income tax and the now perennial call to encourage additional supply all floated since the beginning of the year as potential solutions to the problem.

Today Australia’s treasurer Scott Morrison even floated the idea of people moving to regional centres in order to solve affordability constraints.

“For young people who are thinking about, can I buy a house in Sydney, or can I buy a house in Melbourne or Brisbane, or things like that, now there is an option if people want to take it in places like Tamworth,” he said.

While the politicians continue to release thought bubbles in the hope that one might garner support from the Australian populace, there’s been plenty of market chatter that increased involvement of investors in the housing market may prompt additional action from Australia’s banking regulator, APRA.

In its March monetary policy statement, the RBA said that “supervisory measures have contributed to some strengthening of lending standards”, seemingly a step back from the more confident tone expressed just one month earlier when it said “supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments”.

On top of remarks from RBA governor Philip Lowe that supervision of lenders would likely be tightened further should investor credit growth keep accelerating, the tweak made to the March statement, along with continued strength in housing data, has seen speculation that tighter macroprudential measures to slow investor activity continue to lift.

As these excellent charts from Westpac reveal, it easy to see why some think that tighter restrictions on housing investors may be the solution to taking the heat out of the property market at present.

The first looks at changes in Australian dwelling prices following the introduction of a 10% annual cap on investor credit growth, along with tougher serviceability requirements, introduced by APRA back in December 2014.

Source: Westpac

And here’s a similar chart, only looking at what tighter macroprudential restrictions did to action clearance rates in Sydney and Melbourne following their introduction.

Source: Westpac

House price growth slowed sharply, as did auction clearance rates. And that was in response to initial tightening from the regulator, not the tougher measures being discussed at present.

Even before the March policy statement was released, creating the current debate over the possibility of increased macroprudential oversight, Bill Evans, chief economist at Westpac, suggested that tighter lending restrictions towards investors were likely to be introduced given recent heat in the property market.

“Given that both Sydney and Melbourne prices are up 14% the RBA and APRA may be considering even tighter macro prudential policies,” said Evans earlier this month.

Given they were effective in the past in slowing housing market activity, it’s understandable why he and other prominent economists think that the regulator should lean on the market.

It’s been tried before, and has been successful. And it would not require a rate hikes from the RBA, an outcome that would hardly benefit the broader Australian economy right now.

That alone suggests it should be the first port of call for policymakers before new and untested policies are introduced on Australia’s $6.2 trillion housing market.

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