A new white paper from the University of New South Wales’ (UNSW) City Futures Research Centre has argued for a new regulatory structure amid skyrocketing house prices and household debt reaching a record national high.
As tracked by the research centre, Australia’s household debt, relative to GDP, rose from 70 per cent in 1990 to almost 185 per cent by 2020. Three-quarters of the total debt in 2020 was in mortgages.
For Australian banks, 60 per cent of debt in their loan books is in residential mortgages – one of the highest proportions globally and a great exposure to potential disruption, according to the report.
UNSW visiting professorial fellow and report lead author Duncan Maclennan called the finding “especially concerning”.
“That means Australian households and the overall financial system have become highly exposed to interest rate change rates and external economic shocks,” he said.
The City Futures Research paper has argued for rebalancing the housing market, saying less volatility would reduce long-term reliance on intermittent macro-prudential lending interventions.
The researchers have called for a stronger role from the Reserve Bank of Australia (RBA) in maintaining housing system stability, under a new national government approach to managing the market.
It has looked to overseas markets, pointing to New Zealand, where its central bank pays attention to house prices in decision-making, and to the European Central Bank, which has a similar stance.
“In Australia, the RBA has strongly rejected such approaches and, flying in the face of decades of evidence, washed its hands of any responsibility for house prices,” the report stated.
“Without coherent evidence, the bank has laid the responsibility on the land planning activities of sub-national governments.”
The envisioned regulatory system, would also include either a new housing agency, or a strengthened housing market remit for the National Housing Finance and Investment Corporation (NHFIC), which would collaborate with the Reserve Bank, APRA, state officials and key housing bodies.
Further, the paper has called for a major inquiry or a royal commission to address how Australia can find better housing outcomes, stating the current inquiry into housing affordability “may assist” but largely precludes a wider understanding of the key issues.
‘The housing crisis always seems to be someone else’s problem’
The RBA has revealed it is working with APRA to monitor the housing market, being ready to implement tools such as limits on high debt-to-income (DTI) or loan-to-value ratio lending, should they deem it necessary.
A rise in high DTI lending recently raised concerns for APRA, but the watchdog has said it will not yet commence action.
But, the Reserve Bank’s interest lies in levels of household debt, not in house prices, as outlined by governor Philip Lowe.
Chris Leisman, professor of property and housing economics at the University of South Australia and report co-author commented: “One of the biggest concerns we have is that the housing crisis always seems to be someone else’s problem.
“The Commonwealth government sees it as something the market will fix, APRA has minimal interest and the RBA states that it is outside its remit. Meanwhile, Australian banks and households are gambling everything on the hope of continually increasing prices.”
The UNSW report also argued that the RBA’s interest rates and quantitative easing policy have resulted in skewed mortgage borrowing towards households with equity as well as the sharp rise in house prices seen in 2020-21 (16 per cent in the year to July 2021).
“The lengthening era of low interest rates and non-traditional measures of monetary policy intervention, that the RBA has managed carefully, has had significant, and often unrecognised, effects on [the] housing market and price outcomes,” the paper stated.
The central bank has “questionably [embraced] a market knows best perspective,” the paper noted, emphasising the short-term demand cycle and neglecting longer-term effects on productivity, inequality and stability.
Meanwhile, other central banks and institutions such as the OECD and IMF have recognised that the COVID pandemic has exacerbated inequalities, disproportionately hitting low-income households and renters while access to cheap borrowing has benefited wealthier cohorts.
“There is increasing awareness that there are longer term growth and productivity effects of high and rising housing costs. The financial instability potentials of present housing market outcomes are becoming worryingly more apparent,” the UNSW report stated.
“This suggests that in relation to long term economic goals the OECD and Australian experience is that the housing market does not always ‘know best’ and that central banks now need more sophisticated targets that involve the major systems that transmit monetary policy influences, and especially labour and housing markets.”
ANZ chief executive Shayne Elliott was recently asked at an analyst briefing if housing affordability should be folded into the RBA’s remit, to mirror the Reserve Bank of New Zealand – but he rejected the notion.
The Kiwi central bank also regulates prudential standards, which is covered by APRA in Australia.
“I think the policy setting in New Zealand, yeah I’m not sure it’s appropriate to lift and shift that and say, therefore the same should be here,” Mr Elliott said.
“I think the Council of Financial Regulators [and] I think the regulatory system does have a perspective and a role to play in terms of housing affordability and I see the way they execute that as through the various arms of that regulatory structure.”
But the ANZ CEO did note the Reserve Bank’s choice to maintain cash rates at its record low level of 0.1 per cent has also been a contributor to the issues around housing and mortgage lending.
“Yes, it makes it harder to save for a home and yes, it encourages increased levels of debt because… you can afford it, if you will, because of the lower servicing costs,” he said.
“And that’s why I think, and again, it is a think, that’s why the Council of Financial Regulators and the RBA made comments about perhaps the need for macro-prudential intervention to offset some of those issues. So it’s a complex issue.”
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Sarah Simpkins is the news editor across Mortgage Business and The Adviser.
Previously, she reported on banking, financial services and wealth management for InvestorDaily and ifa.