"House prices being on hold for so long was a function of the major banks’ credit policy. The current combination of record low interest rates and increased lending is a sign of a normal functioning market that in turn is inspiring more Australians to want to own their own home.
With banks now going back to trend and viewing property as a safe investment asset, any property bubble burst is highly speculative given historical trends and the fact that higher LVRs shows fewer defaults than lower LVRs.
We do not have a cavalier lending system in Australia and Australian borrowers do not fail their borrowing requirements because we value our ability to pay.
The ultimate hand brake on any market burst is the fact that 70 per cent of property is in hands of owner occupiers who take their repayment requirements very seriously and will move heaven and earth to keep a good credit rating and stay in their home.
New lending innovations, such as peer to peer payments are a welcome sign of a healthy functioning market. However, in addition to increasing house supply, which still lags demand, further innovation is required to enable first time home buyers to get a foot on the property ladder and a complete rethink is needed for first home buyers to maybe purchase smaller or indeed buy for investment as opposed to their home.
A better option for this group would be for the availability of higher loan to value ratio (LVR) rate at lower cost with the opportunity to allow parents to provide limited guarantees for up to 20 per cent of the loan to come off when property value increases. Some banks also take into account rent payments as an offset and this should be standard.
However, with banks now vying for business and market share, the biggest potential detraction to hit the property market will be for the Reserve Bank to aggressively push up interest rates to hold back an increasingly improving economy. But this is a sledge hammer approach given the divergent health of the various state economies.
Governor Glenn Stevens recently alluded to other tools that are available to the RBS which may include introducing borrowing ratios, a lever that banks could be forced to employ other than the big stick of interest rates increase which will impact business and consumer confidence.
Borrowing ratios are implemented by the industry regulator to keep rates up in order to reduce lending, which could reduce property prices. This combination could take away the blunt force instrument of numerous interest rate rises. Following positive jobs growth news in some sectors only, the RBA should maintain its watching brief in coming weeks and focus on creating an environment where interest and inflation are managed in concert at around 6 per cent and no more than 2.5 per cent respectively.
For now we should be thankful of Australia’s resilience to world events. Looking ahead, we must find new ways to grow productivity and consumer confidence whilst considering more innovative approaches to helping more Australians own property."