MOODY'S: Curbs On Lending Would Barely Affect Australian House Prices

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Restricting home finance in Australia in a bid to cool prices wouldn’t have a large impact, according to analysis by rating agency Moody’s.

“The economy outside of the property market remains weak, suggesting that interest rates will remain low for an extended period,” says senior economist Glenn Levine says in the Moody’s Australian Housing Update report.

“As this drives increased housing activity and rising prices, regulators may revert to macroprudential controls to cool the market.

“Our model offers a first look at how these may affect house prices.”

The latest statistics show house prices still well supported but with growth easing nationally. Sydney is the big driver with 14.6% growth to the year to September.

The Reserve Bank of Australia’s (RBA) favoured approach is to apply more stringent stress tests for borrowers, including confirmation that they continue to meet repayments even as interest rates increased.

Modelling this would be difficult.

Another way to look at how to restrict lending is the approach taken by the Reserve Bank of New Zealand, which limited the number of high loan-to-value ratio loans a lender can write.

This appears to have had some effect in cooling the property market but a high loan-to-value ratio benchmark is likely to hit first home buyers and may have lifted house prices in cheaper suburbs.

Moody’s says questions of fairness have featured in RBA musings and the central bank appears reluctant to apply similar measures in Australia.

“Yet casting aside these concerns, and purely to get a model-driven gauge of house price sensitivity, we have applied the RBNZ’s assumptions to the Australian market to get a feel for what similar re- strictions would do in Australia,” Levine says.

Moody’s Analytics simulated a blanket cap on loans over 80% Loan To Valuation Ratio (LVR), making it stricter than New Zealand, and tested the effect on house prices.

Here are the results:

The results are smaller than the corresponding figures for New Zealand with house prices 2% lower after two years, or about double this Australia result.

“House prices are most sensitive in New South Wales, where a lot of speculative investment has taken place,” Levine says.

“Queensland is least affected, as house prices have drifted towards undervalued and so are supported by the long-run drivers in the model.

“The results suggest that Australia’s market may be more resilient to similar restrictions, possibly because New Zealand house prices were overvalued when the restrictions were introduced.”

Moody’s argues that housing in Australia is still fairly valued at current interest rates.

“House prices in Australia have continued to rise through the second half of 2014,” Levine says.

“Yet the Australian housing market remains fairly valued as the long-run drivers of house prices —rents, incomes and interest rates — are supportive of current prices.”

Moody’s says New South Wales house prices are close to fair value. The Victorian housing market, however, looks increasingly overvalued.

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