Not too hot, not too cold -- RBA and APRA have a tough task managing Australia's residential property market

The auction for ‘The Block’ / Getty (File)

Increased investor activity, RBA monetary policy settings and, to a lesser degree, foreign investors, are continuing to push Australian property prices higher despite weak wage growth and elevated household indebtedness.

So says Lombard Street Research economist Konstantinos Venetis who suggests burgeoning property market conditions are “amplifying (Australia’s) financial system’s vulnerability to future shocks”.

On Chinese investment, Venetis suggests there are several push and pull factors leading to surging levels of investment.

“With prices in China’s policy-driven real estate market retreating, the economy slowing and Beijing cracking down hard on corruption, capital has been increasingly looking to diversify abroad; not least as expectations of one-way CNY appreciation have been shaken to their foundations.

At the same time, Australia’s relative proximity, rule of law and high educational standards constitute an attractive set of intangible attributes. Furthermore, Singapore and Hong Kong – both prime global real estate investment destinations – have introduced sizeable surcharges for foreign buyers, dampening demand at least at the margin”.

While this partly explains the continued rise in Australian property prices, Venetis believes RBA monetary policy settings are the main factor underpinning continued house price appreciation.

“However, the overarching catalyst behind surging investment in Australian real estate — from both domestic and foreign buyers — has been the RBA’s monetary stance. The combination of successive interest rate reductions and talking down the A$ has underpinned the build-up of froth in an overheating market. The currency angle is often underestimated.

Meaningful depreciation relative to the CNY — amounting to 20% over the last 12 months and almost 50% since the commodity supercycle peaked in 2011 — has rendered Australian real assets increasingly attractive to Chinese yield-seeking investors, be it wealthy individuals, property developers or insurance companies. This is true regardless of whether they are using cash or credit; anecdotal evidence suggests that the vast majority of China-based mortgage holders is financed by Australia’s ‘big 4’ banks”.

He believes greater macro-prudential regulation towards the housing market — including strict speed limits on mortgage lending — would be the most effective measure to cool the hot housing sector.

“Recent regulatory efforts (e.g. application fees for all foreign buyers and an additional stamp duty charge in Victoria) will do little to stem the tide as long as foreign capital has incentive to flow overseas and the RBA has scope for additional easing — particularly in view of the rather tight Budget announced this month.

Effective speed limits on Australian banks’ mortgage lending have a better chance of delivering results; especially if policymakers address the threat posed by low, internally generated risk weights and the still high share of interest only investor credit”.

While Venetis is not alone in calling for greater macro-prudential measures, if we’ve learnt anything from recent economic data, Australia requires a healthy residential property market to help offset the effects of the sharp unwind in the mining CAPEX boom.

It’s a tricky position for the RBA and APRA to manage.

On one hand property prices can’t be allowed to grow at rates that could create substantial financial risks ahead, while on the other they can’t be stopped, or even allowed to fall slightly, given its the only real factor underpinning economic growth at present.

A balanced approach, one that regulators already appear to be moving towards, is most likely to deliver the desired result.

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