Examine role of leverage in house prices: Westpac

The head of Westpac, Peter King, made the observation at the House of Representatives’ standing committee on economics hearing last week when he was asked by committee chair Tim Wilson about whether macro-prudential tightening of lending standards could be applied in a manner that does not pose a barrier to first home buyers attempting to enter the property market while preventing “excessive borrowing”.

Mr Wilson noted that discussions have been swirling around concerns about rising house prices and whether a tightening of prudential regulation is required to prevent an “overheating” of the market, and prevent borrowers from overextending their finances.

However, Mr Wilson said: “One of the concerns that I have around tightening prudential regulation is you can end up in a situation where it favours capital interests or those who have existing capital and harms first home buyers who need to get a share of their income to borrow.”

He then asked Mr King: “Is there a way that Westpac believes that prudential regulation can be tightened if required, and (accepting that may not be required at the moment) where it might stop excessive borrowing or what could be deemed to be excessive borrowing for people upgrading their home versus avoiding the risk that it becomes a barrier for first home buyers to get into the market?”

Addressing the issue of the need for tightening macro-prudential standards, Mr King posited that it is important to examine the role leverage is playing in influencing housing prices.

He said three areas that act as strong indicators of leverage playing a role is high loan-to-value ratio (LVR) lending by lenders, the amount of interest-only lending, and the amount of investor lending.

“Those three areas are much lower than what we saw in the last peak of housing prices, and generally up a little bit, but not too much in the last six to 12 months,” Mr King said.

Recent analysis by the Reserve Bank of Australia (RBA) found that the share of high LVR lending increased over the second half of 2020 but has remained low by historical standards (a trend corroborated by CoreLogic’s analysis of Australian Prudential Regulation Authority data).

The central bank attributed the increase last year to owner-occupiers to the greater share of first home buyers, who it said have been responding to government incentives such as the HomeBuilder scheme and the First Home Loan Deposit Scheme, and lower interest rates, which have increased the appeal of purchasing a home over renting.

Furthermore, the share of interest-only lending has remained steady at low levels, while the share of lending at high debt-to-income ratios increased over the second half of 2020 following earlier declines, according to the RBA.

Mr King also told the committee that lenders apply interest rate floors in the calculation of home loans to “prevent the lower interest rates being capitalised” and how much borrowers can borrow.

“That’s often something that is considered in a macro-prudential sense where you want to set it,” he said.

Mr King also said that the question of how to assist first home buyers with entering the property market is an important issue, and added that “getting people into the market is very important”, although he did not elaborate on how this could be facilitated.

When asked by Mr Wilson if houses are becoming more valuable or if money is being devalued, Mr King responded that he believes that houses are becoming more valuable.

Mr Wilson pursued this point, asking Mr King if he believed houses are more valuable in an environment where immigration levels have stalled due to border closures amid the coronavirus pandemic, and there have been “no changes to laws to incentivise investment in capital, while we have devaluation of money”.

Mr King responded by stating that one of the metrics he monitors closely is new listings as a proportion of property sales, adding that sales are outpacing new listings.

“We’ve got excess buyer demand versus stock in the market, and market prices clear by going up when that happens,” he said.

“As I get out into the regions, whether that be mostly in New South Wales at the moment, the Riverina in New South Wales or central part of New South Wales, everyone I talk to are saying … there’s a shortage of employees [where] they can’t get employees that they need to get, and often there’s also problems with accommodation so I think we’re in a market where there’s not a lot of turnover in the market.

“It’s pretty tight. Therefore, the stock that’s coming up is well bid,” he said, adding that the COVID-19 crisis has tilted buyer demand towards detached houses and away from apartments.

Mr King said that in the longer term, interest rate levels would drive asset prices in the economy, including housing prices.

He concluded: “In the longer term, the asset vale will move with financing costs.

“And we’ve already seen interest rates in the longer end of the curve (10 years) increase. Obviously, they’re not going to, in the short end of the curve up to three years with the RBA (Reserve Bank of Australia) policy, but that will be a driver of asset prices in the economy, including housing prices, longer term.”

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