New curbs tipped as housing booms

Regulatory intervention to cool the booming housing market is looking increasingly likely before the end of the year.

Major-bank chief executives have generally talked down the need for macroprudential intervention in the housing market but their economic teams, which often express independent views, have not been so reticent.

Pundits are becoming more insistent that financial regulators will intervene to curb the housing boom, despite the latest prognostication from Reserve Bank governor Philip Lowe that “at the moment we don’t have a problem here”.

Dr Lowe’s assessment came on Tuesday, after the RBA slightly tapered its high level of support for the economy but maintained the cash rate at a record low of 0.1 per cent.

On Thursday, Evans & Partners analyst Matthew Wilson targeted the RBA and the Australian Prudential Regulation Authority for failing to act as house prices surged 16 per cent in the June financial year – the highest annual growth rate since April 2004, when the housing boom of the early 2000s started to wind down.

“Both the RBA and APRA continue to avoid accountability on the surge in house prices, a puzzling posture when house prices collateralise at least 63 per cent of system credit,” Wilson said in a note.

“We risk turning from virtuous to vicious.”

Vicious is one way of putting a potential fracturing of $1.93 trillion in total housing credit, now growing at a rate of at least 5 per cent.

The mortgage portfolios of the nation’s banks equate to 63 per cent of outstanding credit, with the household debt-to-GDP ratio at a world-leading 124 per cent.

Further, 62 per cent of new home loans have a debt-to-income (DTI) ratio of more than four times, with 19 per cent at more than six times.

This compares to the 15 per cent speed limit in the UK for loans with a DTI ratio of more than 4.5.

Mr Wilson acknowledged that the financial regulators had no mandate to control housing prices.

“But it’s puzzling, because the value of a house is very important in terms of the collateral of the financial system,” he said.

“The risk is that we are creating a vulnerable banking system, which last year had to defer about 10 per cent of its loans as a result of the pandemic.

“The banks have plenty of capital and provisions, but we’re creating some long-term fragility.”

Dr Lowe referred on Tuesday to the latest consideration of the issue by the Council of Financial Regulators at its quarterly meeting on June 11.

The CFR, comprising the RBA, APRA, the Australian Securities & Investments Commission and the federal Treasury, said owner-occupiers had accounted for most of the increase in household borrowing, unlike previous periods of intervention where investors were dominant.

While the demand for credit by investors had been subdued, it was now increasing, and housing markets were strong across Australia.

Council members reiterated the need for lending standards to remain sound in an environment of low interest rates and rising housing prices. Lending standards, however, remained sound.

Close attention was also being paid to trends in household debt, with members discussing the risks which could build if growth in household borrowing “substantially outpaced” growth in income.

For Dr Lowe, there were two main areas of focus – lending standards, where there was “no evidence of a deterioration”, and the sustainability of trends in household credit.

Credit growth, he noted, was running at 6-7 per cent and was picking up.

“What neither APRA or the RBA want to see is credit growing too quickly relative to people’s incomes,” he said.

“We have quite high levels of household debt already – in my view, it’s not in the country’s interest to have debt increasing at a much, much higher rate than people’s incomes.

“So if we saw a large and sustained gap in household credit growth relative to income growth, then we’d be looking at various policy responses to deal with that.

“At the moment, we haven’t got a problem here – household debt growth is higher than income but not massively higher.”

Dr Lowe nominated three different kinds of measures which could be implemented: an increase in the interest serviceability buffer from 2.5 percentage points above the advertised mortgage rate; loan-to-valuation restrictions, and debt-to-income restrictions.

“I don’t see the need to move on any of these at the moment,” he said.

“Ultimately it’s a matter for APRA, but we’re watching the trends in household debt very carefully.”

Major-bank chief executives have generally talked down the need for macroprudential intervention in the housing market.

Their economic teams, which often express independent views, have not been so reticent, with ANZ the latest example.

On Thursday, senior economist Felicity Emmett reaffirmed her view from early March that regulators would need to step into the market before the end of 2021.

“The latest data show that pressure to cool the housing market has intensified,” Ms Emmett said.

“Housing finance commitments rose 4.9 per cent month on month in May and are up a massive 95 per cent over the past year.

“Moreover, investor lending is accelerating, rising more than 30 per cent over the past three months, suggesting that a speculative element is emerging in the market.”