22-09-2014, 11:40 AM
(21-09-2014, 07:04 AM)greengiraffe Wrote: [ -> ]Bill Evans, Westpac's chief economist, this week questioned whether the current market was anything as strong as the 2000 to 2003 boom, when growth in credit to investors peaked at 30 per cent and total housing credit hit 22 per cent a year. Today's annual credit growth for investors is running at 8.9 per cent, while total growth is 6.7 per cent.
RBA drawn to house bubble controls
Jacob Greber and Vesna Poljak
909 words
20 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Price growth across the bubbling housing market could be more than halved if regulators impose the first restrictions on mortgage lending in a decade, according to a leading forecaster.
Increasingly alarmed by signs investors are taking on too much risk and ignoring the potential for price falls, officials at the Reserve Bank of Australia are actively considering a range of measures to slow categories of borrowers, which some expect might be unveiled in a financial services review on Wednesday.
While both RBA governor Glenn Stevens and Treasurer Joe Hockey remain deeply reluctant to adopt such controls, the double bind of having to maintain record-low interest rates and keep downward pressure on the Australian dollar mean tightening monetary policy is not an immediate option.
House prices have surged almost 16 per cent over the past year and will gain by as much as 9 per cent over the next 12 months, says Louis Christopher, a managing director at SQM Research.
Mr Christopher, who correctly predicted last year's surge, said controls on mortgage lending were a logical and real possibility, and if introduced, would cut next year's price gains to as little as 2 per cent and no more than 5 per cent.
Mr Hockey, speaking during the lead-up to this weekend's Group of 20 finance minister's meeting in Cairns, said "obviously the Reserve Bank will look at some of the macroprudential" policy issues – or the use of restrictions on lending – could be an option to prevent the property market from becoming dangerously overvalued.
The RBA on Tuesday ramped up warnings about the potential for investors to get burnt when prices fall.
Amid speculation about shifting official attitudes to the state of the housing market, banks and leading economists cautioned that direct intervention may fail and create unintended consequences.
Australian Bankers' Association chief executive Stephen Münchenberg said the experience of New Zealand – which imposed controls last year that largely hit first-time buyers – should be a lesson. Mr Münchenberg said the RBA and Australian Prudential Regulation Authority were already keeping an "incredibly close" watch on lending standards and housing market developments, and that what is being contemplated was a form of mortgage rationing.
"The danger of these sorts of things is we see what's happening in housing is not a demand-driven thing, in the sense that we're not providing extra loans that are driving the market, we're just meeting demand in the market," he said. "The other consideration with this is there's a lot of talk of the fact that house prices are driven by investors so they won't necessarily be affected by any of these sorts of tools, because they're not necessarily getting funding from the bank."
Experts said one way regulators could lean on lending would be by forcing banks to hold more capital against the loans they provide, essentially making such lending more expensive. However, industry figures said such moves were complicated.
Bank of America Merrill Lynch economist Saul Eslake said examples from around the world, including from New Zealand and Canada, showed such efforts were not always successful. "My understanding is that the Reserve Bank thinks macroprudential is a 21st-century term for a mid-century form of intervention that doesn't work and distorts the financial system," Mr Eslake said.
"They don't like it philosophically… and the RBA and [deputy governor] Phil Lowe are very close to the Bank for International Settlements point of view that if you have a bubble you have to lift rates," Mr Eslake said.
The last time anything close to macroprudential tools were used was in 2003 when APRA responded to an explosion in investment buying by raising risk weights on housing loans and capital requirements for lenders' mortgage insurers.
Bill Evans, Westpac's chief economist, this week questioned whether the current market was anything as strong as the 2000 to 2003 boom, when growth in credit to investors peaked at 30 per cent and total housing credit hit 22 per cent a year. Today's annual credit growth for investors is running at 8.9 per cent, while total growth is 6.7 per cent.
Graham Wolfe, Housing Industry Association chief executive for industry policy, said, "if we start doing things to financial systems and access to borrowing on the basis of what might be perceived as a price problem in Sydney, how do you minimise the impact in Canberra, Hobart and other places? In some respects a macroprudential approach is a fairly blunt tool".
Mark Bayley, a credit strategist at Aquasia was struck by how the RBA had warmed to the idea. "At the end of the day you're trying to stop buyers being over-extended in maybe Sydney and Melbourne property market, and that is largely by investors rather than owner-occupiers. Equally, you don't want to stop first-home buyers from getting on to the property ladder, so how do you address that?"
Peter Jones, Master Builders Australia chief economist, said there was no case for restricting lending where there was no housing bubble. "One of the reasons why the RBA cut rates was to encourage new homebuilding. "A rising market encourages builders to be active. We have a housing deficit and we don't want to risk limiting the number of new homes being built."
with Rebecca Thistleton
Fairfax Media Management Pty Limited
Document AFNR000020140919ea9k0001x
Monetary tool is blunt as it affects the whole spectrum of the economy. The best way is to hurt the risk/ reward of the speculator on LTV ratio, capital gains tax, minimum holding period etc like what Singapore, HK & China did. It has to be structural rather than monetary so as to be targeted to minimise collateral damage
These are not something new nor unprecedented but people sometimes are just captive by their own philosophical baggage or paradigm, like Greenspan admitted being "obsessed with the free market" ideology
And then suddenly the demand and supply dynamics change because demand vaporises. What was shortfall in supply becomes oversupply