An influx of investors in Australia’s property sector is throwing the housing and mortgage market off balance and he Reserve Bank is threatening action.
Speaking at the inquiry into affordable housing, the RBA’s Assistant Governor Malcolm Edey today said: “The composition of housing and mortgage market activity is becoming unbalanced.”
National housing prices have been rising at a rate of around 10% over the 12 months, and around 15% in Sydney.
But it’s the jump in investor finance which is outpacing the growth in household incomes and the sticking point that investor loans currently making up almost 50% of new housing loan approvals that has got the RBA worried.
Investor loan approvals have increased by about 90% over the past two years in NSW alone.
“Prices have continued to rise significantly faster than incomes, and this has been associated with strong growth in investor activity,” Edey said.
Today Edey said assistance can help some segments of the market, including first home buyers but unless it’s coupled with a supply-side strategy the increased demand will just be capitalised into prices, which is largely what happened when first home buyer grants were implemented.
“Attention needs to be given to supply-side factors in any policy response to perceived problems of affordability,” Edey said.
Edey revealed the RBA is currently in discussions with APRA (Australian Prudential Regulation Authority) about how sound lending practices might be reinforced – especially around investor finance but Edey said it’s “not necessarily limited to that”.
“I want to emphasise that the banks in Australia are resilient, and mortgage lending in this country has historically been relatively safe. APRA has, however, noted a trend to riskier lending practices, and over the past couple of years has been seeking to temper these through its supervisory activities,” he said.
“There are also broader concerns with the macroeconomic risks associated with excessive speculative activity, since this activity can amplify the property price cycle and increase risks to households.”
It’s the third week in a row the RBA has spoken out on housing affordability. The first alarm sounded in the RBA’s September board minutes when it said “additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later“.
The second warning was delivered in its Financial Stability Review last week when it noted the composition of the housing finance sector is unbalanced. More on that here.
Whether housing is affordable differs for each market segment, for example, renters or owners, investors or first home buyers – but it all hinges on property prices, household incomes and availability of finance.
For purchasers affordability can be measured as a ratio to disposable income, Edey explained using that metric shows housing affordability has been largely stable over the past 30 years with average repayments varying between 20 and 30 per cent of disposable incomes.
But he cautioned that has been rising as the housing market picks up pace and “the ratio of housing prices to incomes is at the top of its historical range”.
However many households hadn’t felt the full pinch as the jump had been partially offset by cheaper finance.
“There is no shortage of housing finance in Australia,” Edey said, adding, “Housing loan interest rates are currently as low as they have been in a generation, and households are not artificially constrained from borrowing as much as they can reasonably be expected to repay.”
Australia’s housing affordability problem isn’t being driven by finance supply, rather it’s demand for property that is fuelling price movements.
In the short to medium term the supply side of the market is dominated by a large existing stock of dwellings, and new supply takes time to come on stream, Edey said.
But in the long term the demand factors need to be carefully managed, including policy around regulatory constraints, the cost structure of the building industry and Australia’s love of low density housing which is gradually changing.
“We can’t improve housing affordability simply by adding to demand,” he said.