Australia Property

(21-09-2014, 07:04 AM)greengiraffe Wrote: Bill Evans, Westpac's chief economist, this week questioned whether the current market was anything as strong as the 2000 to 2003 boom, when growth in credit to investors peaked at 30 per cent and total housing credit hit 22 per cent a year. Today's annual credit growth for investors is running at 8.9 per cent, while total growth is 6.7 per cent.

RBA drawn to house bubble controls
Jacob Greber and Vesna Poljak
909 words
20 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Price growth across the bubbling housing market could be more than halved if regulators impose the first restrictions on mortgage lending in a decade, according to a leading forecaster.

Increasingly alarmed by signs investors are taking on too much risk and ignoring the potential for price falls, officials at the Reserve Bank of Australia are actively considering a range of measures to slow categories of borrowers, which some expect might be unveiled in a financial services review on Wednesday.

While both RBA governor Glenn Stevens and Treasurer Joe Hockey remain deeply reluctant to adopt such controls, the double bind of having to maintain record-low interest rates and keep downward pressure on the Australian dollar mean tightening monetary policy is not an immediate option.

House prices have surged almost 16 per cent over the past year and will gain by as much as 9 per cent over the next 12 months, says Louis Christopher, a managing director at SQM Research.

Mr Christopher, who correctly predicted last year's surge, said controls on mortgage lending were a logical and real possibility, and if introduced, would cut next year's price gains to as little as 2 per cent and no more than 5 per cent.

Mr Hockey, speaking during the lead-up to this weekend's Group of 20 finance minister's meeting in Cairns, said "obviously the Reserve Bank will look at some of the macroprudential" policy issues – or the use of restrictions on lending – could be an option to prevent the property market from becoming dangerously overvalued.

The RBA on Tuesday ramped up warnings about the potential for investors to get burnt when prices fall.

Amid speculation about shifting official attitudes to the state of the housing market, banks and leading economists cautioned that direct intervention may fail and create unintended consequences.

Australian Bankers' Association chief executive Stephen Münchenberg said the experience of New Zealand – which imposed controls last year that largely hit first-time buyers – should be a lesson. Mr Münchenberg said the RBA and Australian Prudential Regulation Authority were already keeping an "incredibly close" watch on lending standards and housing market developments, and that what is being contemplated was a form of mortgage rationing.

"The danger of these sorts of things is we see what's happening in housing is not a demand-driven thing, in the sense that we're not providing extra loans that are driving the market, we're just meeting demand in the market," he said. "The other consideration with this is there's a lot of talk of the fact that house prices are driven by investors so they won't necessarily be affected by any of these sorts of tools, because they're not necessarily getting funding from the bank."

Experts said one way regulators could lean on lending would be by forcing banks to hold more capital against the loans they provide, essentially making such lending more expensive. However, industry figures said such moves were complicated.

Bank of America Merrill Lynch economist Saul Eslake said examples from around the world, including from New Zealand and Canada, showed such efforts were not always successful. "My understanding is that the Reserve Bank thinks macroprudential is a 21st-century term for a mid-century form of intervention that doesn't work and distorts the financial system," Mr Eslake said.

"They don't like it philosophically… and the RBA and [deputy governor] Phil Lowe are very close to the Bank for International Settlements point of view that if you have a bubble you have to lift rates," Mr Eslake said.

The last time anything close to macroprudential tools were used was in 2003 when APRA responded to an explosion in investment buying by raising risk weights on housing loans and capital requirements for lenders' mortgage insurers.

Bill Evans, Westpac's chief economist, this week questioned whether the current market was anything as strong as the 2000 to 2003 boom, when growth in credit to investors peaked at 30 per cent and total housing credit hit 22 per cent a year. Today's annual credit growth for investors is running at 8.9 per cent, while total growth is 6.7 per cent.

Graham Wolfe, Housing Industry Association chief executive for industry policy, said, "if we start doing things to financial systems and access to borrowing on the basis of what might be perceived as a price problem in Sydney, how do you minimise the impact in Canberra, Hobart and other places? In some respects a macroprudential approach is a fairly blunt tool".

Mark Bayley, a credit strategist at Aquasia was struck by how the RBA had warmed to the idea. "At the end of the day you're trying to stop buyers being over-extended in maybe Sydney and Melbourne property market, and that is largely by investors rather than owner-occupiers. Equally, you don't want to stop first-home buyers from getting on to the property ladder, so how do you address that?"

Peter Jones, Master Builders Australia chief economist, said there was no case for restricting lending where there was no housing bubble. "One of the reasons why the RBA cut rates was to encourage new homebuilding. "A rising market encourages builders to be active. We have a housing deficit and we don't want to risk limiting the number of new homes being built."

with Rebecca Thistleton


Fairfax Media Management Pty Limited

Document AFNR000020140919ea9k0001x

Monetary tool is blunt as it affects the whole spectrum of the economy. The best way is to hurt the risk/ reward of the speculator on LTV ratio, capital gains tax, minimum holding period etc like what Singapore, HK & China did. It has to be structural rather than monetary so as to be targeted to minimise collateral damage

These are not something new nor unprecedented but people sometimes are just captive by their own philosophical baggage or paradigm, like Greenspan admitted being "obsessed with the free market" ideology

And then suddenly the demand and supply dynamics change because demand vaporises. What was shortfall in supply becomes oversupply

(22-09-2014, 11:40 AM)specuvestor Wrote:

(21-09-2014, 07:04 AM)greengiraffe Wrote: Bill Evans, Westpac's chief economist, this week questioned whether the current market was anything as strong as the 2000 to 2003 boom, when growth in credit to investors peaked at 30 per cent and total housing credit hit 22 per cent a year. Today's annual credit growth for investors is running at 8.9 per cent, while total growth is 6.7 per cent.

RBA drawn to house bubble controls
Jacob Greber and Vesna Poljak
909 words
20 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Price growth across the bubbling housing market could be more than halved if regulators impose the first restrictions on mortgage lending in a decade, according to a leading forecaster.

Increasingly alarmed by signs investors are taking on too much risk and ignoring the potential for price falls, officials at the Reserve Bank of Australia are actively considering a range of measures to slow categories of borrowers, which some expect might be unveiled in a financial services review on Wednesday.

While both RBA governor Glenn Stevens and Treasurer Joe Hockey remain deeply reluctant to adopt such controls, the double bind of having to maintain record-low interest rates and keep downward pressure on the Australian dollar mean tightening monetary policy is not an immediate option.

House prices have surged almost 16 per cent over the past year and will gain by as much as 9 per cent over the next 12 months, says Louis Christopher, a managing director at SQM Research.

Mr Christopher, who correctly predicted last year's surge, said controls on mortgage lending were a logical and real possibility, and if introduced, would cut next year's price gains to as little as 2 per cent and no more than 5 per cent.

Mr Hockey, speaking during the lead-up to this weekend's Group of 20 finance minister's meeting in Cairns, said "obviously the Reserve Bank will look at some of the macroprudential" policy issues – or the use of restrictions on lending – could be an option to prevent the property market from becoming dangerously overvalued.

The RBA on Tuesday ramped up warnings about the potential for investors to get burnt when prices fall.

Amid speculation about shifting official attitudes to the state of the housing market, banks and leading economists cautioned that direct intervention may fail and create unintended consequences.

Australian Bankers' Association chief executive Stephen Münchenberg said the experience of New Zealand – which imposed controls last year that largely hit first-time buyers – should be a lesson. Mr Münchenberg said the RBA and Australian Prudential Regulation Authority were already keeping an "incredibly close" watch on lending standards and housing market developments, and that what is being contemplated was a form of mortgage rationing.

"The danger of these sorts of things is we see what's happening in housing is not a demand-driven thing, in the sense that we're not providing extra loans that are driving the market, we're just meeting demand in the market," he said. "The other consideration with this is there's a lot of talk of the fact that house prices are driven by investors so they won't necessarily be affected by any of these sorts of tools, because they're not necessarily getting funding from the bank."

Experts said one way regulators could lean on lending would be by forcing banks to hold more capital against the loans they provide, essentially making such lending more expensive. However, industry figures said such moves were complicated.

Bank of America Merrill Lynch economist Saul Eslake said examples from around the world, including from New Zealand and Canada, showed such efforts were not always successful. "My understanding is that the Reserve Bank thinks macroprudential is a 21st-century term for a mid-century form of intervention that doesn't work and distorts the financial system," Mr Eslake said.

"They don't like it philosophically… and the RBA and [deputy governor] Phil Lowe are very close to the Bank for International Settlements point of view that if you have a bubble you have to lift rates," Mr Eslake said.

The last time anything close to macroprudential tools were used was in 2003 when APRA responded to an explosion in investment buying by raising risk weights on housing loans and capital requirements for lenders' mortgage insurers.

Bill Evans, Westpac's chief economist, this week questioned whether the current market was anything as strong as the 2000 to 2003 boom, when growth in credit to investors peaked at 30 per cent and total housing credit hit 22 per cent a year. Today's annual credit growth for investors is running at 8.9 per cent, while total growth is 6.7 per cent.

Graham Wolfe, Housing Industry Association chief executive for industry policy, said, "if we start doing things to financial systems and access to borrowing on the basis of what might be perceived as a price problem in Sydney, how do you minimise the impact in Canberra, Hobart and other places? In some respects a macroprudential approach is a fairly blunt tool".

Mark Bayley, a credit strategist at Aquasia was struck by how the RBA had warmed to the idea. "At the end of the day you're trying to stop buyers being over-extended in maybe Sydney and Melbourne property market, and that is largely by investors rather than owner-occupiers. Equally, you don't want to stop first-home buyers from getting on to the property ladder, so how do you address that?"

Peter Jones, Master Builders Australia chief economist, said there was no case for restricting lending where there was no housing bubble. "One of the reasons why the RBA cut rates was to encourage new homebuilding. "A rising market encourages builders to be active. We have a housing deficit and we don't want to risk limiting the number of new homes being built."

with Rebecca Thistleton


Fairfax Media Management Pty Limited

Document AFNR000020140919ea9k0001x

Monetary tool is blunt as it affects the whole spectrum of the economy. The best way is to hurt the risk/ reward of the speculator on LTV ratio, capital gains tax, minimum holding period etc like what Singapore, HK & China did. It has to be structural rather than monetary so as to be targeted to minimise collateral damage

These are not something new nor unprecedented but people sometimes are just captive by their own philosophical baggage or paradigm, like Greenspan admitted being "obsessed with the free market" ideology

And then suddenly the demand and supply dynamics change because demand vaporises. What was shortfall in supply becomes oversupply

No worries mate... Renters still need to buy a roof over their heads... migrants still need to buy houses as they usually would and money launders still need to find a safe harbour for their ill gotten $...

No Vested Interests
GG

Negative gearing not just enclave of the rich

THE AUSTRALIAN SEPTEMBER 22, 2014 12:39PM

Kylar Loussikian

Journalist
Sydney

What is negative gearing?Lizzy Hubbard
THE vast majority of property investors taking advantage of negative gearing are “mum and dads” earning less than $80,000 a year, countering the long-held view that the property investment measure was a tax lurk for the rich.

Australian Taxation Office data shows that of the 1.266 million Australians who declared that the rental on their investment properties didn’t meet the interest repayment in 2011-12, 883,325 earned less than $80,000.

More than 70 per cent of people who accessed negative-gearing benefits, where losses on property investments can be deducted from taxable personal income, only owned one investment property. A further 18 per cent owned two investment properties.

About 60,000 clerical staff earning less than $80,000 benefited from negative gearing, as did 54,000 teachers, 46,000 sales staff and 35,590 nurses and midwives. Lizzy Hubbard, a 29-year-old teacher from The Ponds, in Sydney’s northwest, said negative gearing was helping her pay for an investment property she had purchased in Muswellbrook in the NSW Hunter Valley.

“I really did want to get into the property market, and I knew it would be difficult to get into,” said Ms Hubbard, who purchased her house when she was 25.

“I hadn’t moved out of home, but I knew I could get a steady income and one day I would be able to benefit from my investment.”

Ms Hubbard admitted she didn’t know the details of negative gearing, and had gone through Aussie Home Loans instead, but knew that an increased tax refund had made it easier to save and pay back her loan.

With no sign of a slowdown in house-price growth — investment bank UBS has forecast that tomorrow’s Australian Bureau of Statistics figures will show a 10 per cent year-on-year increase — calls to address affordability and the debate around the housing bubble will continue.

With a tax review likely over the coming months, a number of economists are already calling for negative gearing to be abolished or pared back to make property investment less attractive, leading industry groups to lobby for it to remain.

“Negative gearing works effic­iently over the life cycle of Australians, with younger people relying upon the concession with a shift towards positive gearing as people get closer to retirement,” said Nick Proud, the executive ­director of the Residential Development Council, which provided the statistics to The Australian.

“Individual investors incentivised by negative gearing have ­increased over the past 30 years and their emergence will reduce the future reliance on the pension.”

Mr Proud pointed out negative gearing applied in the majority of OECD countries and said its removal in Britain had not improved housing affordability.

ALAN MITCHELL


How RBA could cool house prices
The main problem for the Australian housing market is investor demand. Photo: Louise Kennerley
Analysis
ALAN MITCHELL
Parents back kids in NZ as LVR caps bite
Banks and at least some home buyers can be only a few months away from the introduction of macro-prudential regulation if the Sydney and Melbourne property prices keep growing at their present rate.

The Prudential Regulation Authority and the Reserve Bank have a wide range of options to choose from, starting with an increase in the lending rate used to test the viability of individual loans when rates return to more normal levels.

The authorities’ concerns about the property market and the danger posed to unwary investors are expected to laid out in the official Financial Stability Report to be published on Wednesday.

House prices in Sydney have risen 15 per cent in the past year and the growth of investor lending has accelerated to annual rate of almost 10 per cent.

In Sydney on the weekend a derelict house in Balmain East sold for $2.7 million, $830,000 above reserve.

The authorities’ concern is not that banks are dangerously exposed: there is no fear for the stability of the financial system.

But the RBA, in particular, will be worried about the potential impact of overheating in the property market on the general economy.

If enough people get sucked into the property market at overheated prices their losses in the inevitable downturn will impact on consumer spending and aggregate demand.

The main problem is investor demand. Credit for owner occupiers is growing more slowly.

Hopefully, the official warnings to investors to be careful and the supply of new dwellings coming off the production line will be enough to cool the markets down.

No one will want to jump into macroprudential regulation. As the Federal Reserve's chair Janet Yellen and New Zealanders warn, macroprudential regulation is no free lunch.

Experience with the regulations is very limited, and the calibration uncertain. How much do you use for a given problem? Use too little and the market keeps galloping away from you; make it a bit tighter and you can create the market crash that you are trying to avoid.

And keep them in place too long and people start finding their way around it. Hello shadow banking!

Apart from increasing the mortgage test rate, other options available to APRA and the RBA include making the banks carry additional capital for, say, investor loans in Sydney and Melbourne, and NZ-style loan-to-valuation ratios.

The Australian Financial Review

BY ALAN MITCHELL

Negative gearing better for affordability: Bob Day
PUBLISHED: 22 SEP 2014 17:30:00 | UPDATED: 23 SEP 2014 05:04:38


ROBERT HARLEY
Negative gearing is not to blame for the problems of housing affordability, according to new Family First senator Bob Day.

“In fact negative gearing is a net contributor towards more affordable housing,” he said at the launch of a new research paper on the policy commissioned by the Housing ­Industry Association on Monday.

“Without negative gearing, ­Australia’s housing situation would be worse.”

Senator Day, who represents South Australia, is a home builder who founded Homestead Homes and Home Australia and was formerly a Home Industry Association president.

He was also a one-time secretary of the right-wing HR Nicholls Society, and a long-term critic of the way governments plan for and tax housing.

“It is not increases in demand that cause prices to rise, but shortages of supply,” he said on Monday.

“And what has caused this lack of supply? Principally, two things – land restrictions and government charges – government charges like up-front infrastructure costs and stamp duty.”

The new research paper, by consultant Independent Economics, argued that rather than adding to the cost of housing, ­negative gearing partially offsets the heavy cost of housing taxes, particularly stamp duty.

The paper said stamp duty added a $7 billion cost to housing, partly offset by a $1.3 billion negative gearing incentive. A reduction in negative gearing, ­without changes to those other taxes, would increase housing costs and lower living standards.

On the Independent Economics model, every extra $1 raised by the ­government in reductions to negative gearing would cut 23¢ from ­household living standards which seems counter-intuitive.

More than 1.3 million landlords negative geared their housing investment in 2011-12, reporting a loss, said the Australian Taxation Office.

In some markets, such as Sydney, investors account for half of all ­purchases.

Negative gearing critics have ­suggested that if the advantages of ­negative gearing were reduced, those investors would not be able to pay as much and the price of housing would fall.

HIA chief economist, Harley Dale, said the results only seemed counter intuitive because no one had ­challenged the starting presumptions.

He said that if the negative gearing rules changed, existing investors would be grandfathered and have no incentive to sell. At the same time, new investors would have no incentive to buy, he said.

“If you remove the incentive, it will have a detrimental impact on owner occupiers as well as on investors,” he said.

Opponents of negative gearing also argue that it inequitably favours the rich, strips the Commonwealth of income, and, with most investors buying existing properties, does little to boost the stock of new housing.

HIA managing director Shane Goodwin, stressed that negative ­gearing was not the domain of ­so-called “wealthy investors”.

“Figures from the ATO demonstrate that 74 per cent of taxpayers receiving rental income have a taxable income of less than $80,000,” he said.

“Discounting residential negative gearing in isolation is a retrograde step for tax reform, in terms of both efficiency and equity.”

“New housing is one of the most highly taxed sectors in the economy, he said.

“Negative gearing promotes ­private investment in the rental ­market, thus stimulating economic activity and taking the pressure off social housing and the public purse.

“With an ageing work force and future pressure on services, policy ­settings such as negative gearing that promote wealth creation and ­self-sufficiency in retirement, should be promoted.”

Senator Day said the report would not stop the critics. As the old saying goes, “Convince a man against his will, he’s of the same opinion still”, he said.

“But every bit helps and this report will be a valuable resource to those genuinely seeking solutions to the housing affordability problem.”

The Australian Financial Review

BY ROBERT HARLEY
Robert Harley
Robert is property editor in our Sydney newsroom.

(22-09-2014, 11:23 PM)greengiraffe Wrote: Negative gearing not just enclave of the rich

THE AUSTRALIAN SEPTEMBER 22, 2014 12:39PM

Kylar Loussikian

Journalist
Sydney

What is negative gearing?Lizzy Hubbard
THE vast majority of property investors taking advantage of negative gearing are “mum and dads” earning less than $80,000 a year, countering the long-held view that the property investment measure was a tax lurk for the rich.

Australian Taxation Office data shows that of the 1.266 million Australians who declared that the rental on their investment properties didn’t meet the interest repayment in 2011-12, 883,325 earned less than $80,000.

More than 70 per cent of people who accessed negative-gearing benefits, where losses on property investments can be deducted from taxable personal income, only owned one investment property. A further 18 per cent owned two investment properties.

About 60,000 clerical staff earning less than $80,000 benefited from negative gearing, as did 54,000 teachers, 46,000 sales staff and 35,590 nurses and midwives. Lizzy Hubbard, a 29-year-old teacher from The Ponds, in Sydney’s northwest, said negative gearing was helping her pay for an investment property she had purchased in Muswellbrook in the NSW Hunter Valley.

“I really did want to get into the property market, and I knew it would be difficult to get into,” said Ms Hubbard, who purchased her house when she was 25.

“I hadn’t moved out of home, but I knew I could get a steady income and one day I would be able to benefit from my investment.”

Ms Hubbard admitted she didn’t know the details of negative gearing, and had gone through Aussie Home Loans instead, but knew that an increased tax refund had made it easier to save and pay back her loan.

With no sign of a slowdown in house-price growth — investment bank UBS has forecast that tomorrow’s Australian Bureau of Statistics figures will show a 10 per cent year-on-year increase — calls to address affordability and the debate around the housing bubble will continue.

With a tax review likely over the coming months, a number of economists are already calling for negative gearing to be abolished or pared back to make property investment less attractive, leading industry groups to lobby for it to remain.

“Negative gearing works effic­iently over the life cycle of Australians, with younger people relying upon the concession with a shift towards positive gearing as people get closer to retirement,” said Nick Proud, the executive ­director of the Residential Development Council, which provided the statistics to The Australian.

“Individual investors incentivised by negative gearing have ­increased over the past 30 years and their emergence will reduce the future reliance on the pension.”

Mr Proud pointed out negative gearing applied in the majority of OECD countries and said its removal in Britain had not improved housing affordability.

strange definition for the term "negative gearing" but I cannot see how government indirectly subsidising negative yield is not a considerable factor for behavior and incentive.

Foreign buyer fee could raise $400m

Jacob Greber Economics correspondent
478 words
24 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Hitting foreign property buyers with a modest application fee could generate more than $400 million to fund a crackdown on illegal purchases blamed for pricing locals out of the market.

A government-dominated parliamentary committee is actively considering whether to impose fees of as much as $1500 per purchase.

The Reserve Bank of Australia will publish its official six-monthly financial stability review on Wednesday, which is expected to lay out official concerns about the property market.

Foreign buyers now pay nothing for applications to the Foreign Investment Review Board, which faces criticism for failing to adequately monitor approvals as well as fielding concerns about a lack of data sharing between it and bodies such customs and immigration.

Liberal MP Kelly O'Dwyer, who leads the inquiry due to report next month, said there had been clear ­"failure of process" at the board, but that it also needed significant resources to audit applications and enforce ­penalties.

"Any additional resourcing of FIRB should come directly from application fees," Ms O'Dwyer said.

"Given the importance of FIRB's rules in providing confidence to the broader Australian community on residential property, ensuring good processing and strong recovery is essential."

Modelling by the independent ­Parliamentary Budget Office obtained by The Australian Financial Review shows a fee of just $500 per successful application could generate $34.6 million over four years.More than offset boards's costs

That would more than offset the boards's annual $4 million budget cost.

If set at the higher rate, some $106 million could flow in by 2017-18 and $412 million by 2024-25.

The budget office modelling as­sumes 21,000 foreigners will successfully buy properties in 2013-14, and the fee applied to all offshore investors, including temporary residents, trusts and funds. It would cover new, existing and off-the-plan residential property as well as land.

Momentum within the committee is understood to be building in favour of recommending such fees, as well as measures to ensure data matching between Immigration and the FIRB.

Work is also being done on whether to hit Chinese and other offshore buyers with extra stamp duties to ensure their participation in the market doesn't worsen housing affordability.

Ms O'Dwyer criticised the FIRB for failing to enforce restrictions on foreign buyers and for a worrying lack of data about offshore investment. Board chairman Brian Wilson hit back on Thursday, saying it could only do so much with the resources it had.

Property industry groups have argued against extra fees on foreign buyers because they would restrain ­residential dwelling approvals, which are at the core of the Reserve Bank's efforts to spur economic growth.

There are also tensions ­­between ­balancing ­community concerns over foreign ­buyers and the government's goals of cutting red tape.


Fairfax Media Management Pty Limited

Document AFNR000020140923ea9o00029

RBA warns again on soaring house prices
THE AUSTRALIAN SEPTEMBER 24, 2014 12:17PM

Michael Bennet

Reporter
Sydney
THE Reserve Bank of Australia has increased its attempts to talk down the investor-led housing boom, warning risks to banks are increasing and borrowers will be the first in line to wear the pain of a correction in house prices.

The RBA also confirmed it is discussions with the Australian Prudential Regulation Authority and other members of the Council of Financial Regulators “further steps that might be taken to reinforce sound lending practices, particularly for lending to investors”.

While RBA and APRA have previously expressed reluctance to impose macro prudential measures — or new rules — to cool the market, the comment today suggests the central bank is changing its tune.

Taking aim at the strongest demand from investors since 2007, the RBA said the share of investor loans approved with loan-to-valuation ratios between 80 per cent and 90 per cent has risen, as has interest-only loans and average loan sizes.

The RBA warned risks to banks were increasing and borrowers would be the first in line to wear the pain of a correction in house prices.

“The RBA’s assessment is that the risk from the current strength in housing markets is more likely to be to future household spending than to lenders’ balance sheets,” the central bank said.

“However, the direct risks to banks will rise if current rates of growth in investor lending and housing prices persist, or increase further.”

Amid increasing concern about the 18-month housing bull market, the RBA said while the banks’ lending standards “do not appear to have eased lately”, there was uncertainty about whether lending practices across are “conservative enough” for the combination of low interest rates, strong housing price growth and higher household indebtedness than in past decades.

“Moreover, lending to investors is expanding at a fast pace, which could be funding additional speculative activity in the housing market and encourage other (more marginal) borrowers to increase debt,” the RBA said.

“Lending growth is varied across geographical markets and individual lenders, which may suggest a build-up in loan concentrations and therefore correlated risks within the banking industry.

“At this stage the main risk from this strong investor activity appears to be that the extra demand may exacerbate the housing price cycle and increase the potential for prices to fall later.”

That could pose risks to the economy if people reacted to declines in their wealth and loan repayment difficulties by cutting back on their spending, the RBA said.

Households that could be most affected weren’t necessarily the ones taking out loans, the central bank added.

There was also the risk that the increased demand would lead to too much construction and an eventual oversupply of housing, the RBA said, but this was more likely to affect specific local markets, particularly in Melbourne.

The RBA said the rise in investor activity had probably priced some potential first-home buyers out of the market.

It said the willingness of some households to take on more debt, combined with slower wage growth, meant the debt-to-income ratio had picked up a little in the past six months.

“While this ratio is still within its range of the past eight years at around 150 per cent, it is historically high and hence any further increases in household indebtedness would be taking place from an already high base,” the central bank said.

The RBA warned banks to be cautious about their lending practices.

“It is important for macroeconomic and financial stability that banks set their risk appetite and lending standards at least in line with current best practice, and take into account system-wide risks in property markets in their lending decisions,” it said.

The RBA said that APRA had increased the intensity of its supervisions around housing market risks facing banks in the past year.

The watchdog is also working on new guidance for sound risk management practices in mortgage lending.

“The characteristics and risk profile of households investment property exposures warrant close examination given the recent strength of investor demand for housing,” the RBA said.

With AAP

Thorburn says supply-demand drive home price surge
THE AUSTRALIAN SEPTEMBER 25, 2014 12:00AM

Paul Garvey

Resources Reporter
Perth
NAB chief executive Andrew Thorburn says it is “old-fashioned” supply and demand, rather than a bubble, that is driving the surge in Australian housing prices.

Speaking to The Australian in Perth yesterday ahead of the release of the Reserve Bank’s latest financial stability review, Mr Thorburn said the housing market seemed to be driven by funda­mentals.

“The issue with housing is fundamentally a supply and demand thing. You’ve got population growth and house supply probably isn’t keeping up with it,” he said. “Being an old-fashioned economist, that supply and demand means prices will go up. I think there’s a big driver underneath all that.”

The RBA yesterday flagged its deepening concerns about the property market, confirming it was in discussions with other regulators about further steps that could be taken to “reinforce sound lending practices”.

“The composition of housing and mortgage markets is becoming unbalanced,” the RBA said.

Mr Thorburn acknowledged that housing prices were always a “difficult issue”.

“Prices are rising, although price-to-income ratios seem to be stabilising a wee bit,” Mr Thorburn said.

He noted that the latest surge in house prices comes on the back of an Australian economy that continued to grow, and a strong and long record of home loan servicing by borrowers.

“Obviously the big driver is the prospects for the Australian economy,” he said.

“The Australian economy is going to grow at 3 per cent next year. Unemployment is the key thing, because when people feel they are secure in their employment they are able to service loans. Australians’ record in servicing home loans has been excellent for 20 years.”

Mr Thorburn said his time running Bank of New Zealand had offered him “a line of sight” of the impacts any similar measures could have if introduced in Australia.

New Zealand has used macroprudential tools to restrict the supply of new lending above the 80 per cent loan ratio into the market.

The growing concerns about the Australian housing market come as NAB continues to advance efforts to scale back its presence in international markets such as the US and Britain.

Scotland’s decision last week to remain part of Britain appears to have cleared the way for an eventual sale of NAB’s Clydesdale Bank

“We were relieved, I must say, about that Scottish referendum,” Mr Thorburn said.

“Our strategy, and we will talk some more about this around the end of year results on October 30, but what I can say today is we are focusing on our core franchise, which we’ve said is Australia and NZ, and supporting particularly our business clients as they grow and expand into Asia, so we’re really moving back to investing in that franchise.

“The other things … we’re describing as non-core. We have to be disciplined but focused on exiting them.”

NAB is already looking to sell off its US subsidiary Great Western Bank.

RBA faces lender backlash over proposed lending curbs
THE AUSTRALIAN SEPTEMBER 26, 2014 12:00AM

Andrew White

Associate Editor
Sydney
Richard Gluyas

Business Correspondent
Melbourne

LENDERS have stepped up their opposition to threatened regulatory moves to curb booming housing prices as Reserve Bank of Australia governor Glenn Stevens defended his backflip over the use of so-called macro-prudential tools, saying there was little downside from trying them in the short term.

Investors joined the criticism of measures that could limit the flow of funds to the housing market, warning that it risked upsetting the broader economy as it moves away from mining investment and high commodity prices.

Moves to restrict foreign buyers are also gaining favour amid concerns they are flouting Foreign Investment Review Board restrictions and signs that moves by other countries such as higher stamp duty on nonresident purchases have succeeded.

Australian Bankers Association chief executive Steve Munchenberg said blunt instruments such as macro-prudential controls risked creating unintended consequences, including denying some home buyers an opportunity to enter the market.

He said there was no sign that banks had been pumping money into parts of the market such as property investors with looser lending standards or lower rates.

“We are meeting demand. If people don’t want us to meet that demand there is a case for macro-prudential regulation but if you are not meeting demand there are people that are missing out on getting into the property market,’’ Mr Munchenberg said.

In its semi-annual Financial Stability Review the RBA this week said the mortgage market was becoming “unbalanced’’ by the rapid growth of lending to property investors and said it was in discussion with other financial regulators about steps to slow the flow of funds.

“Direct risks to financial institutions would increase if these high rates of lending growth persist, or increase further,’’ the RBA said.

The threat of more regulation has come at a delicate time for banks with shares down heavily this month and David Murray’s Financial System Inquiry due to report soon on measures that could force the bank to raise tens of billions of dollars in additional capital.

Macroprudential tools include limits on the loan to valuation ratio at which banks can lend to home buyers and high capital buffers for banks to effectively increase the cost to banks of lending.

But restrictions on mortgage LVRs in New Zealand have attracted criticism from banks, who said they forced established home buyers to instead target cheaper housing, pushing up prices in the market most commonly used by first home buyers.

The threat of further regulation has been greeted with a mixture of scepticism and alarm amid suggestions the central bank was just using the threat of regulation to “jawbone’’ the banks into tightening their lending criteria.

“Wether you need to regulate because the property market is hot to trot is a matter for debate,’’ said Peter Nash, the chairman of big four accounting firm KPMG

“I think in this case it is interesting that it seems to be the intent (of the RBA) to talk about having regulation in the hope that that will help curb the excesses, as opposed to actually having regulation’’

Mr Stevens, who once called macro-prudential tools a “fad”, defended his backflip on using home-lending restrictions to cool an overheated property market, saying weapons other than monetary policy should be considered if they were likely to have some impact.

“I’m not naive enough to think that these (macroprudential tools) are any kind of panacea or permanent solution,” the RBA chief told a conference in Melbourne.

“That doesn’t mean you shouldn’t use them if at the margins they might be helpful.”

However, official interest rates, which have been at a record low of 2.5 per cent to try and engineer a transition in growth to the non-resources sector, have inspired a housing boom in the key markets of Sydney and Melbourne.

Investor finance has been surging, with the RBA governor pointing to double-digit growth in interest-only lending, which currently accounts for about half of new home-loan approvals.

“I think it’s perfectly sound and sensible to ask ourselves whether there are tools that might at least lean on that a bit,” he said.

“I don’t see much downside; the worst that could happen is that it doesn’t much effect.

“If it has some effect and helps square in some way all the conflicting things going on, it’s worth a try.”

But Robert Penaloza, head of Australian equities at Aberdeen Asset Management, which invests in the banks, said the moves did pose risks to the economy at a time when it was soft and attempting to change gears from mining investment and commodity prices towards housing and consumption.

“ I’d be a bit cautious because I think we’re still trying to transition,” he said.

“I just think we need to be a bit more discerning where we apply the measures and maybe stimulate where we need to, maybe give more tax breaks to first home buyers.”

He suggested exploring measures in Asia such as slugging nonresidents with higher stamp duty charges as Singapore did.

Restrictions on foreign buyers may already be coming, with Liberal MP Kelly O’Dwyer, chairwoman of a parliamentary economics committee inquiry into foreign investment in real estate, calling last week for tougher penalties on foreign buyers caught buying established dwellings.

Michael Russell, the chief of Mortgage Choice, one of the largest mortgage brokers, said further regulation of lending would be an “overreaction’’.

“Yes volumes are up but there’s no dropping standards,” said Mr Russell, a former banker.

“I’ve been in home lending for 30 years and the number one principle has always been that if a borrower can comfortably demonstrate good employment and serviceability you don’t have too many problems.

Lindsay Partridge, the managing director of building materials group Brickworks, which is looking forward to its best trading year in a decade, said regulators should focus on measures to increase supply as a way of cooling prices.

“We have had the planning restrictions, but we had the Reserve Bank holding the interest rates higher because they were worried about the mining boom.

“Now they really need to keep the interest rates down to keep the currency under control, and we really need to catch up with ten years of work that didn’t happen.”