Housing sector

APRA must do more to chill the housing sector – ShareCafe

Australian trade commentators, analysts and investors went a little wild at the weekend after APRA, the main financial regulator, dipped its toe in house price waters and revealed a slight tightening of service rules real estate loans.

He was blamed for the drop in the ASX 200 on Wednesday, banking stocks, especially Commonwealth and no doubt the bad batch of beer or wine being made anywhere in Australia that day.

As a regulatory measure, it was a tester and nothing more. Further tightening awaits the regulator as price increases are clearly unsustainable at a 20% annual growth rate.

Raising the service buffer from 2.5% to 3% will have a small impact in limiting some people (and putting more pressure on rental markets), but if APRA had raised the buffer to 4% to 5%, then he would have a big one – off impact, but maybe enough to dampen the heat of the market and the price spike.

The last housing boom ended by making interest-only loans too expensive and difficult for most homebuyers.

This saw, for example, Sydney’s average house value fall by 10.1% from its peak in 2017 to November 2018. This surpassed the previous fall of 9.6% from 1989 to 1991 (during the sharp recession), according to CoreLogic.

But policies such as higher wages, increased social housing construction and more land releases (and permanent stamp duty reductions for first-time home buyers and penalties for investors) should have been added to the political mix.

The Morrison government doesn’t want that, however, nor do state governments under pressure to stabilize revenues on their side of their budgets while spending remains under pressure from the fight against Covid Delta.

And if you look at the experience in New Zealand (where prices are rising 30% a year), it will be a long, hard road if the goal is to slow the rise in property prices and bring them down to a non-threatening level for the system.

New Zealand has restricted tax benefits for investors and tightened controls on how much can be borrowed and who can borrow (high net worth individuals).

But that had little impact on price growth or on increasing the supply of housing.

APRA President Wayne Byres said in his statement Wednesday announcing that the tightening of the ruling was a response to home debt rising faster than household income and the growing number of customers borrowing more than six times their income, an amount considered more risky.

“In taking action, APRA is focusing on the safety of the financial system and ensuring that banks lend to borrowers who can afford the level of debt they are taking on – now and in the future” , Mr. Byres said. “While the banking system is well capitalized and overall lending standards have held up, the rising share of heavily indebted borrowers and household sector indebtedness in general mean that medium-term risks for financial stability accumulate.”

It’s a matter of financial system stability, not affordability, which is an entirely different discussion and the more serious of the two, because inequality hurts everyone.

The RBNZ has so far changed its macroprudential controls on home loans three times in 2021 with no impact on rising prices – measures have included tightening loan-to-valuation ratios, forcing higher deposits, rationing the credit to high LVR loans and a few other fiddles with the rules, all with no real purpose.

And it hasn’t worked, as New Zealand’s central bank noted in its Wednesday statement that “the level of property prices is currently unsustainable.” It’s been like that since the beginning of the year.

“Members noted that a number of factors are expected to restrain house prices over the medium term.”

“These include a high rate of housing construction, slower population growth, changes in tax settings and stricter bank lending rules. Rising mortgage interest rates, while monetary stimulus is reduced, would also constrain house prices to a more sustainable level.

“Members noted a risk that any continued near-term price growth could lead to steeper house price declines in the future.”

Not now, the medium term in central banking is three years.

In a September 3 statement revealing the third attempt to change home lending rules, the RBNZ confessed that house prices were “unsustainable”.

“The Reserve Bank’s analysis indicates that house prices are above their sustainable level, and the risks of a housing market correction continue to rise. We propose further tightening of macroprudential lending standards to reduce financial stability risks associated with subprime mortgage borrowing.

About four weeks later, no change, so the RBNZ was forced to use the most blunt instrument of monetary policy of all, an interest rate hike, with the added threat of more to come.

Of course, the main reason for the rate hike was the worrying levels of inflation or, as the RBNZ put it:

“Headline CPI inflation is expected to rise above 4% in the near term before returning towards the mid-point of 2% in the medium term. The short-term rise in inflation is accentuated by rising oil prices, rising transportation costs and the impact of supply shortages.

“These immediate relative price shocks are likely to lead to more generalized price increases. Currently, measures of core inflation and medium-term inflation expectations remain close to 2%.

It’s the Kiwi central bank’s particular obsession with being all hairy about controlling inflation. This is a stark contrast to the views of the RBA, as Governor Philip Lowe said in his post-meeting statement on Tuesday:

“Inflation is hovering around 1¾ percent and wages, as measured by the wage price index, are only increasing by 1.7 percent. While disruptions in global supply chains affect the prices of certain goods, their impact on the overall inflation rate remains limited.

Governor Lowe has made it clear that the RBA does not see inflation being “sustainably” within the 2% to 3% target “until 2024”.

But the RBNZ hasn’t said it so bluntly, but rising house prices can indirectly contribute to higher inflation (via the wealth effect or by forcing up housing and rental), and it supports the unspoken rationale for using a rate hike to start puncturing an entrenched house price boom.


In the second of its two Financial Stability Reports for 2021, the Reserve Bank warned on Friday that:

“Strong price growth and extrapolative price expectations can lead to excessive exuberance in housing markets, he said.

“There has been an accumulation of systemic risks associated with high and growing household indebtedness. Vulnerabilities could deepen if the strength of the housing market gives way to exuberance with expectations of further price increases leading borrowers to take on more risk and banks potentially easing lending standards.

The RBA then suggested that there were other options for APRA to control house prices, including restrictions on debt service costs relative to a household’s income, lending restrictions to income and stricter appraisal lending standards.

Some commercial banks have already tightened standards, requiring more recent tax returns or updating sources of variable income, he pointed out.

The RBA has signaled that if credit growth, currently at 7.5% a year, were to increase towards 10%, then more restrictions were likely. This growth is driven by real estate credit, which is growing strongly.

“A sustained recovery in housing credit growth well above household income growth would add to the risks associated with the already high level of household debt,” he warned.

But again, these warnings about financial stability, not affordability and equality, which many commentators freely mistakenly confuse.