Why now is not the time to hit the brakes on lending

The current increase in property prices is not a uniquely Australian outcome of the pandemic: right across the world, property prices are increasing rapidly.

With property prices rising rapidly, there are growing expectations that macroprudential policies will be re-enacted to introduce more conservative lending and cool price growth. With no signs of deteriorating lending standards, it would be prudent to wait a little longer.

Over the past year, national property prices have increased rapidly, with realestate.com.au data showing a 20.8 per cent increase.

It is unusual to see most regions across Australia experience strong price growth, but that’s exactly what has happened over the past 12 months. Combined capital city prices rose 19.3 per cent, while combined regional market prices increased 25.1 per cent.

All capital city and regional markets have achieved double-digit annual growth.

While prices have risen rapidly since the onset of the pandemic, over recent years growth has been much more benign. In total over the past five years, prices have increased by 34.3 per cent, with 20.8 per cent of that growth occurring over the past 12 months alone. In this context, price growth in Australia since 2016 has not been particularly strong, with previous macroprudential measures a strong contributor to this weak price growth.

The current increase in property prices is not a uniquely Australian outcome of the pandemic: right across the world, property prices are increasing rapidly. In the US, Canada, Britain and New Zealand, prices have risen by more than 10 per cent over the past year.

The Reserve Bank and the Australian Prudential Regulation Authority have repeatedly stated that policy decisions are not tied to particular property price targets, and macroprudential measures address deteriorating lending standards. While the RBA and APRA are watching closely for deteriorating lending standards, public statements indicate it’s not something they are currently seeing.

Rising property prices in Australia and around the world are primarily on the back of record low mortgage rates brought on by the pandemic and the subsequent economic recessions it has created.

The other large factor fuelling an increase in property prices in Australia is our slow Covid-19 vaccine rollout, which is resulting in ongoing lockdowns and isolation from the rest of the world.

Cameron Kusher, executive manager, economic research, at REA Group.

The international borders remain closed, and state and territory governments are quick to close domestic borders when local Covid-19 outbreaks occur. What this means for Australians is that we can’t travel overseas like many usually would, and we can’t travel domestically due to the threat of possible state border closures.

Travel restrictions continue to limit the ways in which Australians can spend their money, so it is not particularly surprising that money is going into the housing market – especially, given how cheap interest is on mortgages and the likelihood that borrowing costs will remain low for a number of years.

This is not to say that a rapid run-up in prices is desirable. However, nor does it mean that regulators should, at this stage, step in and put a stop to these price rises if there is no sign of deteriorating lending standards.

While calls for macroprudential intervention will continue to grow louder as prices continue to rise, the RBA and APRA should resist these calls for the time being, unless of course there is a meaningful deterioration in lending standards.

Rolling closures of domestic borders and the ongoing closure of international borders will remain a feature of the economy during the pandemic. NSW, Victoria and the ACT are currently in prolonged lockdowns, which will probably lead to a contraction in national economic activity over the September quarter and potentially the December quarter as well.

Additionally, there is already an indication that some of the heat has come out of the property market, with the rate of price growth slowing over recent months and demand for property not as strong as it was earlier this year.

Property price increases and the wealth effect they (hopefully) create are a key component to Australia’s economic recovery.

With the hope of lockdowns ending as Covid-19 vaccination rates increase and a view to reopening the international border next year, a return to a more normal and functioning economy should lead to less demand and money being poured into housing, and more funds heading into things such as tourism and travel.

This isn’t to say that the RBA and APRA shouldn’t continue to closely monitor lending standards; however, it would be a mistake to introduce macroprudential policies too soon. Doing so just because property prices are rising rapidly could potentially lead to a slowdown in the domestic economy’s performance.

Hopefully, we’re only months away from lockdowns being largely a thing of the past and international borders reopening, at which time it would be prudent to reassess property market conditions.

Other countries are already at a point where domestic and international travel is returning and it will be intriguing to see what impact this has on demand for property and growth in property prices. Looking overseas could offer a glimpse into the future for Australia once lockdowns and travel restrictions are no more.

Cameron Kusher is executive manager, economic research, at REA Group