• 22/02/2024

House price surge could force new tightening


Ingrid Fuary-Wagner| Australian Financial Review| 3 December 2019

Economists warn that Australia’s banking regulators will be pressured into introducing a new round of macroprudential tightening measures if the strong and swift surge in house prices continues into the new year.

Property prices in Sydney surged 2.7 per cent in November, the highest monthly growth rate since 1988, while Melbourne property values grew by 2.2 per cent over the same period, according to the latest CoreLogic Home Value Index.

Sydney is now on track to recoup the 15 per cent loss in prices suffered during the 18-month downturn early next year and reach a new record high by March.

The boost from the re-election of a Coalition government, rate cuts by the Reserve Bank and APRA’s relaxation of the 7 per cent mortgage rate serviceability test were continuing to drive a surge in property prices, with pent-up demand over the period of falling prices now being unleashed, AMP Capital’s chief economist Shane Oliver said.

“If [the housing market] continues to gather pace, leading to a rebound in credit growth to levels that causes the RBA to worry about financial stability, then expect a new tightening of the screws from bank regulators,” Mr Oliver said.

While it was “increasingly likely” the regulators would be forced to act, it was likely to be at least another three months away.

The latest data showed credit growth – which APRA would be keeping a close eye on – was in the doldrums, but Mr Oliver said the figures “masked a multitude of sins below the surface”.

“It’s probably being depressed at present by existing borrowers paying back their debt faster than normal,” Mr Oliver said.

“The housing finance figures released by the ABS had been rising for the last four months, pointing to an acceleration in new housing-related lending which should start to push credit growth up in the months ahead.”

Economist Stephen Koukoulas also expected credit growth to increase now that house prices had taken off and new borrowers required a bigger mortgage to get into the housing market.

“I dare say the rise in prices and the ease at which people can get credit is likely to see credit growth pick up – probably an annual increase of 5 to 7 per cent,” Mr Koukoulas said.

Flow-on effects

He said the surge in house prices, and possible upside of the wealth effect, could give the RBA a reason not to cut rates in the future, reinforcing the RBA’s tricky balancing act when it came to the property market versus the broader weakening economy.

“If they are getting worried [about house prices], then maybe this is more of a regulatory issue rather than interest rate question,” Mr Koukoulas said. “So if APRA were to tighten lending standards again then the RBA could cut and they wouldn’t add fuel to the fire to this pick-up in house prices.”

He surmised that APRA would not be happy to see another two or three more months of property prices increasing by more than 2 per cent.

However, APRA chairman Wayne Byres said on Monday the regulator’s focus was on financial stability and not the property market.

“We don’t target house prices, we don’t seek to set house prices … we are much more interested in credit provided by the bank,” Mr Byres said.

“Credit growth is still low … need for immediate action is not obvious.”

APRA earlier this year loosened home loan rules, which had been in place since 2014, that had required banks to test the serviceability of prospective borrowers against a 7 per cent mortgage rate.

The banking regulator also lifted a 30 per cent cap on the proportion of interest-only mortgages issued by a bank and the 10 per cent annual growth restriction on lending to property investors.

Prices in November increased in every capital city except Darwin, with a 2.3 per cent rise in Hobart, 1.6 per cent in Canberra, 0.8 per cent in Brisbane and 0.5 per cent in Adelaide.

Even in Perth, where property prices have been trending lower since mid-2014, values grew by 0.4 per cent.

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