A leading economist believes that the continued strength of the housing market could force the banking regulator to announce even tighter restrictions on mortgage lending as a rising Aussie dollar leaves the RBA hamstrung on interest rates.
Two major forces are pulling Australia’s central bank in very different directions when it comes to monetary policy: A rising Australian dollar, which the Reserve Bank warns is bad for economic growth, is a good reason to leave rates on hold or even cut them.
However, recent housing data points to a resurgence in the Sydney and Melbourne property markets—a decent reason to raise rates and cool demand, particularly at a time when fears are mounting about the nation’s record household debt levels.
“The Reserve Bank is still between a rock and a hard place,” AMP Capital chief economist Shane Oliver told Mortgage Business. “I don’t think they can raise rates because the broader economy wouldn’t warrant it. We are still in this place where growth is subpar and wages growth is at record lows. Throw in a rising Aussie dollar and it makes things even harder for the RBA on the rates front.”
APRA’s most recent macroprudential measures to rein in interest-only lending, which began in March, have had “some impact” but not enough, Mr Oliver said. While the Sydney market has cooled off somewhat and auction clearance rates are down to around 65 per cent from their heady 80 per cent range last year, recent data shows that price growth remains strong.
Sydney house prices increased by 2.2 per cent over the last three months, while Melbourne grew 4.2 per cent, according to CoreLogic.
“Home prices are still solid and despite some weakness in April and May, prices seem to have bounced back again in Sydney and particularly Melbourne,” Mr Oliver said. “Given the inability of the RBA to do anything on rates, pressure might mount again on APRA.”
Yet APRA boss Wayne Byres has stated on more than one occasion that house prices are beyond the regulator's remit. Rather, APRA is focused on lending standards and not on the performance of the real estate assets that secure Australian mortgages. This then begs the question of whether rising property prices, as a financial stability issue, have slipped through the cracks between the RBA and APRA.
Mr Oliver said that if house prices keep rising, it could create a problem anyway, one where prudential standards could be sacrificed and ultimately create a macro problem down the track—and a macro risk for the banks, “such that today’s lending standards might at some point look to be not strong enough."
He said: “I believe the regulator needs to take a broader look at these things—that bubbly housing markets create problems for the banks down the track.”
In the UK, regulators have chosen loan-to-income ratios as a lever for controlling risk in the mortgage market. While LTI controls are not out of the question for Australia, Mr Oliver said that reconsidering the current 10 per cent cap on investor lending is more likely.
“Ten per cent seems a very high number," Mr Oliver said, "and if household income is growing at around 4 per cent at the moment and investor lending is growing at 10, it still implies an increase in the debt-to-income ratio, which is the number that the RBA and regulators keep wheeling out every so often.”
[Related: Fresh warnings over rising debt levels]