RBA to play ‘greater regulatory role’ in real estate

JP Morgan says the central bank and prudential regulator will increase their regulatory oversight of the residential property market independent of cash rate movements.

Speaking at a breakfast event hosted by crowdfunding platform CoAssets and the Property Council of Australia late last month, JP Morgan vice president of real estate research Ben Brayshaw said there is “very good reason” to be cautious about the residential sector as lending standards tighten.

“There is more uncertainty on foreign capital and we would argue that the RBA in conjunction with APRA is looking to play a greater regulatory role in residential, independent of monetary policy,” he said.

“We are seeing lending standards tighten up so there are some very good reasons to be somewhat circumspect. Supply is part of the reason for that. The number of new apartments is starting to spike.”

JP Morgan sees the supply of new apartments potentially becoming an issue next year, primarily in Melbourne, Brisbane and to a lesser extent in Sydney.

“In Melbourne you have got a reasonably concentrated supply of construction in the Docklands and Southbank. In Brisbane it is similar as well, concentrated on the areas around South Brisbane and Fortitude Valley,” he explained.

“Sydney has similar dynamics playing out in pockets of oversupply in south Sydney and Parramatta.”

Mr Brayshaw admitted that there are “challenges in residential”, pointing to one key dynamic that is becoming increasingly difficult to predict: lending standards.

“The impact of banks potentially reducing LVRs and adopting a more conservative approach on apartment valuation imposes additional liquidity requirements on owner-occupiers and investors looking to settle.”

He added that JP Morgan will be watching the development of this over the next six to 12 months.

Mr Brayshaw’s comments about the RBA’s regulatory role “independent of monetary policy” coincide with those made by Glenn Stevens this week.

In his final speech as governor, the Reserve Bank boss said he has serious reservations about the extent of reliance on monetary policy around the world.

Mr Stevens highlighted that, through a combination of “extraordinary circumstances”, the central banking community globally has found itself doing “unprecedented things”.

“We in Australia have done fewer such things, but we are connected to the world, and the effects of policies adopted elsewhere condition the policy choices available to us.”

Although we have not implemented ‘unconventional policies’, Mr Stevens said Australia has interest rates at levels lower than any of us have seen before in our lifetimes. Moreover, he remarked that the ‘return to normal’ at the global level “looks like being a very, very slow process. And normal is a different place now.”

Macroprudential measures introduced in late 2014 by the RBA and APRA were aimed at cooling the investor-driven property markets in Sydney and Melbourne.

Central banks around the world have increasingly resorted to such measures in recent years. Last month the Reserve Bank of New Zealand proposed a 60 per cent LVR cap on investors in an effort to mitigate risks to financial stability in that country’s current housing boom.

RBNZ governor Graeme Wheeler said New Zealand’s banking system is heavily exposed to the property market with residential mortgages making up 55 per cent of banking system assets.

[Related: Non-resident, apartment lending crackdown continues]

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