05-08-2013, 11:50 PM
Australian: Analysts fear RBA's rate cuts could fuel property price bubble
BY:MICHAEL BENNET From: The Australian August 06, 2013 12:00AM
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Source: TheAustralian
RECENT history is laced with central bank actions having unintended consequences and the Reserve Bank's rate cuts aimed at helping the economy cope with the end of the mining investment boom is causing concern of a looming property price bubble.
AFG, the nation's largest mortgage broker group, yesterday revealed it processed 25 per cent more mortgages last month than a year ago, with one in four for lenders other than the big four banks.
While refinancings made up about 35 per cent, the fear is the big banks will push back if threatened by smaller rivals, which are enjoying more favourable access to capital than in previous years.
Market economists expect the RBA to cut interest rates to a record low of 2.5 per cent today and again before the end of the year, with yesterday's weaker-than-expected retail sales report highlighting the pressure on the RBA to move.
"If they (non-banks) get too aggressive then the banks will start to step in and that's when you potentially start to build systemic risk," said one prominent banking analyst who declined to be named. "It could all end in tears two years down the road, but I guess the RBA is questioning whether they want to see it end in tears in six months if activity doesn't pick up."
Capital city house prices have recovered 6.5 per cent from the bottom in May last year, with Sydney up 3.7 per cent in the last quarter and 6.5 per cent for the year to a median $570,000, according to RP Data.
Inner-city Sydney home opens reveal the level of demand, as investors desperate for yield use cheap capital to compete and price out first-home buyers. Michael Russell, chief executive of Mortgage Choice, said there had been a surge in demand for loans from investors and that the economy needed sustainable home price rises rather than a "booming property market again".
The RBA wants lower rates to fire up construction, not just pump up the price of inner-city apartments and terraces.
"There are many forces at work with respect to dwelling prices and the regulators and the RBA need to very mindful when they are pulling levers of both the intended and unintended consequences," Mr Russell said.
In New Zealand, regulators are eyeing revising loan-to-value ratios amid concern about the broader effects of rising house prices. According to Nomura analysts, the banks here too could face "macro-prudential intervention to prevent unintended consequences of low rates on housing leverage" if credit growth improved materially.
Data from the Australian Prudential Regulation Authority last week confirmed the RBA's cuts were starting to boost lending, with annual housing credit growth running at its highest level in almost a year at the same time as the rate of growth in retail deposits in the June quarter slowed.
Mr Russell said he had not seen the non-banks increase their share of loans. Data last week showed the major banks had actually increased market share.
Stockbroker Charlie Aitken said years of fear had caused investors' to squirrel away $546 billion in term deposits, which ultimately would shift into higher-yielding assets as returns got crunched by the RBA's cuts.
"This is exactly what happened in the US and it's coming to Australia as we join the ultra-low, extended period, cash rate club," he said.
Of course, the bursting of the US housing bubble remains fresh in the minds of regulators and the local banks, some of the strongest in the world.
But thanks to their large mortgage books, the big four banks have high leverage ratios. Regulators have indicated they will look at how lenders assess risk and how heavily they are geared up.
Alphinity Investment Management fund manager Andrew Martin said the banks were likely to be watching house prices closely but were not yet overly concerned as customers made mortgage payments at a rapid rate.
Bank share prices are close to their highs and analysts have labelled it "bubble territory". AFG said it did not see any signs of overheating in the market.
The RBA would be watching the market very closely.
BY:MICHAEL BENNET From: The Australian August 06, 2013 12:00AM
Increase Text Size
Decrease Text Size
Mortgages
Source: TheAustralian
RECENT history is laced with central bank actions having unintended consequences and the Reserve Bank's rate cuts aimed at helping the economy cope with the end of the mining investment boom is causing concern of a looming property price bubble.
AFG, the nation's largest mortgage broker group, yesterday revealed it processed 25 per cent more mortgages last month than a year ago, with one in four for lenders other than the big four banks.
While refinancings made up about 35 per cent, the fear is the big banks will push back if threatened by smaller rivals, which are enjoying more favourable access to capital than in previous years.
Market economists expect the RBA to cut interest rates to a record low of 2.5 per cent today and again before the end of the year, with yesterday's weaker-than-expected retail sales report highlighting the pressure on the RBA to move.
"If they (non-banks) get too aggressive then the banks will start to step in and that's when you potentially start to build systemic risk," said one prominent banking analyst who declined to be named. "It could all end in tears two years down the road, but I guess the RBA is questioning whether they want to see it end in tears in six months if activity doesn't pick up."
Capital city house prices have recovered 6.5 per cent from the bottom in May last year, with Sydney up 3.7 per cent in the last quarter and 6.5 per cent for the year to a median $570,000, according to RP Data.
Inner-city Sydney home opens reveal the level of demand, as investors desperate for yield use cheap capital to compete and price out first-home buyers. Michael Russell, chief executive of Mortgage Choice, said there had been a surge in demand for loans from investors and that the economy needed sustainable home price rises rather than a "booming property market again".
The RBA wants lower rates to fire up construction, not just pump up the price of inner-city apartments and terraces.
"There are many forces at work with respect to dwelling prices and the regulators and the RBA need to very mindful when they are pulling levers of both the intended and unintended consequences," Mr Russell said.
In New Zealand, regulators are eyeing revising loan-to-value ratios amid concern about the broader effects of rising house prices. According to Nomura analysts, the banks here too could face "macro-prudential intervention to prevent unintended consequences of low rates on housing leverage" if credit growth improved materially.
Data from the Australian Prudential Regulation Authority last week confirmed the RBA's cuts were starting to boost lending, with annual housing credit growth running at its highest level in almost a year at the same time as the rate of growth in retail deposits in the June quarter slowed.
Mr Russell said he had not seen the non-banks increase their share of loans. Data last week showed the major banks had actually increased market share.
Stockbroker Charlie Aitken said years of fear had caused investors' to squirrel away $546 billion in term deposits, which ultimately would shift into higher-yielding assets as returns got crunched by the RBA's cuts.
"This is exactly what happened in the US and it's coming to Australia as we join the ultra-low, extended period, cash rate club," he said.
Of course, the bursting of the US housing bubble remains fresh in the minds of regulators and the local banks, some of the strongest in the world.
But thanks to their large mortgage books, the big four banks have high leverage ratios. Regulators have indicated they will look at how lenders assess risk and how heavily they are geared up.
Alphinity Investment Management fund manager Andrew Martin said the banks were likely to be watching house prices closely but were not yet overly concerned as customers made mortgage payments at a rapid rate.
Bank share prices are close to their highs and analysts have labelled it "bubble territory". AFG said it did not see any signs of overheating in the market.
The RBA would be watching the market very closely.