RBA deputy governor Guy Debelle issues warning on housing market
The nation’s top financial watchdogs have warned of a “protracted’’ downturn in parts of the housing market.
The nation’s top financial watchdogs have warned of a “protracted” downturn in parts of the housing market and are closely watching moves by major banks to pull back from lending to residential property developers.
Reserve Bank deputy governor Guy Debelle said yesterday the central bank was closely monitoring a shift in lending by the banks amid tumbling apartment prices and cautioned that the manoeuvre could overshoot and spark a downturn in the housing market.
Dr Debelle’s comments came as the new deputy chairman of the banking regulator, John Lonsdale, said the Australian Prudential Regulation Authority was overhauling its processes to ensure the financial system could weather a potential “unseasonable cold snap” that might follow 27 years of economic expansion. The pair stressed that recent interventions by the Council of Financial Regulators in the $1.6 trillion housing market was aimed at shoring up standards and reining in loose lending, and had delivered a more resilient system.
Josh Frydenberg said the remarks by the Reserve Bank “highlight the changing dynamic in the housing market, with targeted and measured interventions focused on investor demand”.
“These actions are helping to strengthen, in the words of the RBA, ‘the resilience of the economy to future shocks’,” the Treasurer said.
Apartment developers have been increasingly forced to source finance from the unregulated non-bank sector, as major banks crimp their loan books under regulatory pressure to lift lending standards.
While national house prices have fallen about 5 per cent since their peak last year — after doubling in the eight years to 2016 — there have been heavier falls in the Sydney and Melbourne property markets. The slide in prices for apartments, in particular those sold off the plan, has been much steeper.
A report from property advisory Ubris, released this week, found that only 46 apartments were sold in new Sydney projects during the September quarter, as a glut of supply washes through the market and sentiment for
the housing sector deteriorates. This compared with 381 new units sold in the same time last year.
Labor Treasury spokesman Chris Bowen said the record level of high housing debt was leaving Australia “more exposed to economic shocks” at the same time that the government was committed to tax concessions that encouraged “excess leverage”, such as negative gearing, which the opposition plans to scale back.
Speaking in Melbourne yesterday, Dr Debelle said limits placed on investor lending and the sale of interest-only loans had cooled investor demand for property and strengthened the financial system and household balance sheets. This had “improved the resilience of the economy to future shocks”.
Dr Debelle said the measures had cut down investor access to finance, which had “indirectly affected” developers’ access to finance: “One risk is tighter lending standards could amplify the downturn in apartment markets if buyers of off-the-plan apartments are unable to obtain finance. This could lead to an increase in settlement failures, further price falls and even tighter financing conditions for developers.”
He noted that few developers have reported much evidence of this so far. However, he said there was a risk that this process “overshoots, leading to a sharper or more protracted decline in activity than we currently expect”.
Tighter finance for developers was a higher risk to the economy than restrictions on households, Dr Debelle said, although the rules could feed through to lending to small business, which were heavily reliant on property for collateral.
The Morrison government this week aimed to take some pressure off the small business financing market, announcing a $2 billion government-backed fund to buy up securitised loans sold to family businesses in the hope it would bring down funding costs for family businesses following a perceived credit crunch in the wake of the royal commission.
Mr Lonsdale, a former Treasury deputy secretary who has been with APRA for about a month, said he would be taking responsibility for “recovery and resolution preparedness”, crisis management and reviewing the regulator’s failure to take companies to court over wrongdoing.
“We’ve had 27 years of continuous economic expansion in Australia with a financial system that is very financially sound,” he said. “But no summer lasts forever.”
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