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Bankers, regulators resist surging house price alarm

Australia’s top bankers and their chief regulator are adamant rapidly rising house prices are not seeding financial risks that warrant lending curbs, but have signalled borrowers’ incomes will be a key indicator for taking future action.

Surging house prices in New Zealand have forced its government to introduce tough curbs through taxation and lending limits. But in Australia, which is set to record house price growth of 2.8 per cent in March alone, regulators are waiting to see the effect on incomes from the wind-up of record government wage subsidies, cash boosts and $10 billion in bank interest payment deferrals.

Australian Prudential Regulation Authority chairman Wayne Byres has outlined the key metrics regulators will focus on to determine if risk levels are bubbling over as property prices surge.

Australian Prudential Regulation Authority chairman Wayne Byres said that while certain risks were rising there was no need for intervention just yet.

“We are alert to signs that very low interest rates and rising housing prices create a dynamic in which households seek to take on even higher debt levels, and that banks searching for credit growth seek to accommodate that demand through greater risk taking,” Mr Byres told The Australian Financial Review Banking Summit.

“Should risks materialise, we have a range of tools we could employ, ranging from interventions similar to that in 2015 and 2017, to the countercyclical capital buffer ... The exact tools we choose will depend on the environment we face, and we are giving careful thought to which tools might work best in different scenarios.”

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Mr Byres said high loan-to-value ratios, high debt-to-income ratios and levels of broker-originated lending had all increased and were key areas APRA was monitoring. He warned the banks to be ready to supply information on how they were managing these key measures of risk.

“We expect that bank boards, management teams and credit risk officers are interrogating these trends closely too.

“They should certainly be expecting questions from us on it!”

Bank of Queensland chief executive George Frazis said the risks in this property market were different to previous booms and that lower unemployment would help maintain incomes.

“It is a bit different from what we’ve seen in the past. It hasn’t made investors come in and speculate and increase prices. This has all been about owner-occupiers,” Mr Frazis told the Summit.

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“It is supply-and-demand driven as opposed to anything else.

“They are important elements that Mr Byres raises, and I would be looking at when do investors really come in, in a large way.

“I’d also say that as long as we’re seeing unemployment come down in a steady way, then I’m feeling fairly good about that growth.”

The share of investor lending and interest-only lending is still below where it was 18 months ago, and well down on the previous cycle.

‘Imbalance’ in supply and demand

Westpac chief executive Peter King said he did not think record low interest rates and growing household debt were contributing to house price growth. Instead, he blamed an imbalance in supply and demand.

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“I don’t think big bank debt is a driver of house prices,” Mr King said. “If I look at what’s happening in housing debt, there is growth, but it’s not like it’s investor or interest-only led, which [it was] the last time we saw big house prices.

“I think it’s a fundamental supply-and-demand issue,” he said.

Westpac recently upgraded its residential property growth forecasts to indicate that nationwide home prices could rise 20 per cent over the next two years.

A key part of this outlook will be the strength in incomes, to service growing debt.

Incomes in Australia have shot up over the past year with record government financial supports, but those supports are starting to wind down, including stimulus payments and wage subsidies such as JobKeeper, which ended on Sunday.

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The same goes for interest payment deferrals. Furthermore, wage growth has been lacklustre at just 1.4 per cent.

Mortgage Choice chief executive Susan Mitchell told the Summit that it would probably be best to delay prudential regulation until after the effects of shrinking government financial supports became clear.

I think the odds are pretty high that we will not see any action from them until at least the third or fourth quarter of this year ... but I do think they will eventually step in.

— Louis Christopher, SQM Research

“The thing I’m interested to see is what happens as of the 31st of March. You have a lot of things happening at one time, and we just need to see how that plays out into the economy and into the real estate market, especially investment properties,” Ms Mitchell said.

“I mean they have the JobKeeper, and that’s huge stimulus that’s coming to and end, as well as the interest payment deferrals and the HomeBuilder as well.

“There is also rent abatement coming to an end. They are all coming together at one time, so I think we just need to see how it plays out.”

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Measured intervention

CoreLogic International chief executive Lisa Claes also said prudential actions should wait.

“A healthy housing market or buoyant housing market has phenomenal positive halo effects in the broader economy, so intervention has to be done in a very measured way,” Ms Claes said.

“I think what the catalysts ... for intervention, apart from the withdrawal of some of the stimulus measures, will be what the states do with stamp duty concessions – that’s always a sharp stick,” Ms Claes said.

Other market watchers such as SQM Research’s Louis Christopher and Coolabah Capital’s Christopher Joye suspect APRA intervention is coming.

“I think the odds are pretty high that we will not see any action from them until at least the third or fourth quarter of this year, maybe not until next year, but I do think they will eventually step in,” Mr Christopher said.

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Mr Joye agreed: “I think inevitably we’re going to see at some point some form of macroprudential intervention.”

Grattan Institute chief executive Danielle Wood said housing affordability would become a big policy issue even if there was no financial instability from rising house prices. Negative gearing and means-testing the family home were policy options to consider.

“In the short term, there’s actually not that much governments could do, but they could go to some of the tax concessions,” she said.

“We could start the debate again about negative gearing, about capital gains tax discount and the way those tax concessions interact; they create an incentive for investors to pile in when rental yields are low and capital growth is high, which is the market that we’re coming into now.”

“You know, that increases the instability in the housing market and crowds out first home buyers,” Dr Wood said.

“So I would like to see the government including the family home in the age pension asset test. What we know at the moment is that houses that are in demand are those family homes, and older Australians actually don’t have an incentive to downsize even where it would make sense to do so in the long term.”

SQM’s Mr Christopher sounded a cautious note, warning that some areas where prices had jumped would see quick retreats, especially regional areas. Investors wanted to avoid being “on the wrong side of a downturn, and a downturn in these regional areas will come eventually”, he said.

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Summary | 10 Annotations
adamant
2021/03/30 11:46
signalled borrowers’ incomes will be a key indicator for taking future action
2021/03/30 11:46
2.8 per cent in March alone
2021/03/30 11:47
Wayne Byres
2021/03/30 11:47
owner-occupiers
2021/03/30 11:51
when do investors really come in, in a large way
2021/03/30 11:51
Westpac chief executive Peter King said he did not think record low interest rates and growing household debt were contributing to house price growth. Instead, he blamed an imbalance in supply and demand.
2021/03/30 11:53
“I don’t think big bank debt is a driver of house prices,” Mr King said. “If I look at what’s happening in housing debt, there is growth, but it’s not like it’s investor or interest-only led, which [it was] the last time we saw big house prices.
2021/03/30 11:53
nationwide home prices could rise 20 per cent over the next two years
2021/03/30 11:54
especially investment properties
2021/03/30 11:54