If All The Housing Bubble Headlines Have You Worried, Here's What You Need To Know

BubbleGetty / Andrew Burton

After New Zealand’s housing market was on a tear for years, the country’s central bank recently took the surprising step of tightening lending to borrowers with less than a 20% deposit on the value of their homes.

So the new rule in NZ is banks can have no more than 10% of their home loans worth over 80% of the value of the property involved. This puts a cap on risky loans and will stop some people getting huge mortgages to get a bigger house than they can afford. This takes some of the heat out of the housing market.

While our own Reserve Bank here in Australia is far off taking such dramatic action, it has been warning about lending standards at Australian Banks. It was a suggestion that has somehow morphed into a concerns, and they’ve hit a crescendo this week after the Financial Stability Report was released. Suddenly there’s a lot of talk about the potential emergence of a housing bubble.

But is there really a housing bubble either in evidence or brewing in Australia at the moment? And is there really any evidence that banks are relaxing their lending standards?

At a lunch in Sydney yesterday ANZ’s CEO of Australian operations, Phil Chronican, said in response to the RBA’s recent comments about lending standards:

I don’t know what would have triggered those comments because I don’t think there is any clear evidence that there has been a lowering of lending standards.

It’s a point Business Insider highlighted earlier this morning with our Chart of the Day. The RBA’s own Financial Stability Review showed the trend in home loans with an LVR between 80-90% is flat and for home buyers who are borrowing more than 90% of the value of the home the trend is down.

There is certainly a link between lending standards and housing market performance. Too harsh lending standards, where banks negatively assess income and property values, can severely constrain credit availability and thus home price growth in an economy.

The reverse is also true. Loose lending standards make the availability of credit easier which helps to bring marginal buyers into the market and thus bid housing prices up.

It is exactly what we saw — catastrophically — in the US housing market. Lax lending standards led to the sub-prime credit crisis and US housing market collapse, which in turn led to the GFC.

But as the chart above shows there is as yet scant evidence in Australia that lending standards are too loose or banks are taking on too much risk.

Prices are certainly rising, in some places very quickly. Cameron Kusher, Senior Research Analyst at RPData told Business Insider:

According to the RP Data-Rismark Home Value Index, combined capital city home values have increased by 5.3% over the 12 months to August 2013. Although the broad trends show rising values, the growth is largely coming from two cities: Perth where home values have increased by 9.4% over the past year and Sydney where values have increased by 7.0%.

Certainly Perth is on a tear and Sydney is getting momentum. But Kusher points out that if you look at the longer-term trends, it’s a different story.

Over the past 10 years, Sydney home values have increased at an average annual rate of 2.4% which is below the rate of inflation over the past decade. Over the past 10 years, Perth home values have increased at an average annual rate of 8.1%, however over the past 7 years they have increased at an average annual rate of just 1.8% which is well below the rate of inflation. With mortgage rates currently well below average levels it is no surprise that these markets which have underperformed for such a long period of time are recording comparatively strong value growth.

That certainly makes sense so why all the talk of bubbles when Perth is still below its peak level by 0.2%, Hobart lags by 11.5%, Brisbane is 9.4% below its high while Darwin, Adelaide and Melbourne are 8.6%, 5.1% and 4.3% below their recent peaks respectively.

Only Sydney at 4% above the recent peak has moved materially but that is hardly startling or bubble-like.

Sure, auction clearance rates are high in the big markets of Sydney and Melbourne and RP Data says the four-week rolling average of combined capital city auction clearance rates are just above 70% which is the highest since mid-2010.

But is that a bubble? No.

What is driving the concerns of the regulators here and in New Zealand is what they think is a spike in LVR loans above 80%.

But as the RBA’s own charts from the FSR show this is hardly an alarming trend. If they weren’t worried in 2009 why are they worried now?

Maybe its just the recent rate of change, maybe it’s the emergence of Self Managed Super Funds into the market and the fact they might be driving prices higher.

The RBA and APRA are right to be alert to housing but not alarmed.

After years of Australian households being circumspect with their spending and worried about their economic future this little bit of house price growth is probably a good thing for consumer confidence and spending and for an Australian economy in transition from dependence on the mining boom to some more domestically-generated growth.

There’s an asterisk to all of this. While the current conditions don’t point to a bubble that would eventually pop, we can’t afford a sustained period of the heat we’re seeing. Kusher said:

Overall, the growth in home values over the recent recovery is not overly confronting by itself however, were it to continue or accelerate from here over a number of years the higher cost of housing and the forecasted rising level of unemployment would heighten the risks of a large downturn.

Have a great weekend and if you’re going to an auction, good luck and don’t go over your limit!

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