More macro-prudential measures are on the way, as regulators assess the tools at their disposal to reign in Australia’s red-hot housing market.
Keep a close eye on this space, because there’s a “good chance” that updates will arrive ahead of the Reserve Bank of Australia’s (RBA) Semi Annual Financial Stability Report on April 13, according to the Royal Bank of Canada (RBC).
In a research note, focused on the investor side of the housing market, RBC analysts Su-Lin Ong and Michael Turner said that renewed activity in investor lending has piqued the interest of regulators who are focused on risks to housing stability.
Ong and Turner note that Australian household debt has continued to rise disproportionately to incomes, as shown in the chart below:
Growth in investor loans has been a key driver of the rise in housing debt. Previous measures to control investor loan growth have had success, which means more measures are now likely given the uptick in sector activity.
As investor loans rose from a share of approximately 33% to 45% between 2012 and 2015, a regulatory response was initiated by the Australian Prudential Regulation Authority (APRA). Measures included a guideline cap of 10% growth in investor mortgage books, at which point APRA would instigate further action.
Ong and Turner said that these measures were initially effective, as investor lending growth slowed for almost 12 months from the middle of 2015.
“Since mid-2016, however, investor mortgage activity has picked up again. By January this year, investors were again accounting for more than 40% of new finance approvals,” they noted.
The recent trend reversal can be seen here:
Ong and Turner said that the recent spike in investor lending has coincided with increased price inflation, particularly in Sydney and Melbourne. Nationwide house price growth has risen back to approximately 10% after slowing to around 5%.
“At a state/city level, house prices have risen strongest in Sydney and Melbourne, reflecting their relative economic out-performance but also, in all likelihood, the amount of investor activity in those markets.”
The analysts note that elevated growth in investor lending poses a number of stability risks, starting with the already high debt/income ratio of Australian households by international standards.
Furthermore, the Australian tax system provides negative-gearing tax benefits which encourages investors to invest with debt, which significantly adds to exposure risk should house prices fall.
With residential mortgages accounting for approximately 65% of bank’s loan books, it’s no surprise that RBA governor Phillip Lowe has recently used stronger language in how best to address clearly apparent risk in the sector.
Indeed, Ong and Turner note that “virtually every speech or public appearance from Lowe since he became Governor has included a discussion around household balance sheets and fragility”.
The analysts expect that more macro-prudential measures are coming soon. Specifically, a reduction in banks’ investor loan growth from 10% to 5% is likely, with the cost of non-compliance being higher capital requirements which will then need to be passed on via increased consumer borrowing rates.
Other macro-prudential options include lower Loan to Value Rations (LVRs) which will require investors to provide extra capital upon purchase, and further increases in borrowing rates for investor loans.
Ong and Turner said that the initial success of earlier measures provides cause for optimism that increased regulation can aid in market stability.
They added the caveat that state and/or federal governments may be politically inclined to introduce measures aimed at housing affordability, which may have the “unintended consequences” of buffeting house prices while regulators simultaneously seek to control stability risk in key markets.