Australia Property

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Median house price reaches $1m in 417 suburbs
AAP AUGUST 21, 2014 6:15PM

Million dollar homes are becoming increasingly common as the median house price in hundreds of Australian suburbs soars above seven figures.

There are now 417 suburbs Australia-wide where you're likely to need at least one million dollars for a home.

It's a jump of more than 100 suburbs in single year, according to RP Data.

Research analyst Cameron Kusher said the phenomenon could only be described as "an explosion".

Sydney dominated the suburban rich list, with 22 of Australia's 25 most expensive locations.

Exclusive harbourside enclave Point Piper sits atop the list, where the median house price is nearly $5.7 million.

Peppermint Grove and Dalkeith in Perth and Toorak in Melbourne were the other three suburbs on the exclusive list.

"Today's results show that higher values, particularly in Sydney, is becoming more prevalent," Mr Kusher said.

"With mortgage rates low and tipped to remain low we would expect that in 12 months time we will have even more suburbs with a median value of $1 million or more."

NSW has 248 suburbs where the median house price is above $1 million, followed by Victoria with 56 and Western Australia with 54.

Tasmania was the only state not to have any suburbs on the list.

Each state's most expensive suburb

New South Wales - Point Piper, media price of $5,692,339

Western Australia - Peppermint Grove, $3,726,975

Victoria - Toorak, $2,943,762

ACT - Forrest, $2,114,357

South Australia - Springfield, $1,819,720

Northern Territory - Larrakeyah, $1,357,792

Queensland - Main Beach, $1,325,689

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Money makes the world go round and that is happening in a predominantly human rights first country like Australia...

Residents band together to cut ‘exceptional’ deals
THE AUSTRALIAN AUGUST 23, 2014 12:00AM

Lisa Allen

Property & Tourism Reporter
Sydney
QLD_CM_REALESTATE_HOME_NORTHSHORE_23AUG14
Demand for apartments is good news for some homeowners. Source: News Corp Australia
POCKETING $3 million from the sale of an old brick bungalow at Lane Cove on Sydney’s lower north shore should put a smile on the face of any resident, given the price is more than double the suburb’s median $1.44m value.

Seventeen residents in two Lane Cove streets banded together to sell their houses to a developer for a combined price of at least $60m having been paid about $4000 a square metre for their property — regardless of whether their house was a dilapidated wreck or a contemporary triple-storey mansion.

From Epping to Earlwood, site amalgamations are starting to happen all over Sydney.

In Melbourne, three house owners in the suburb of Bentleigh recently snared a multi-million dollar windfall with the sale of their properties in Bent Street for a combined $5.76m — at least $2m more than they could have expected had they sold the properties separately. Savills Australia, which negotiated the deal, billed it an “exceptional” result.

However, it can take a while to negotiate these deals, particularly when parties pull out at the last minute, or plans for large apartment towers are rejected by the local council.

After two years of intense negotiations the amalgamated site in Sydney’s Lane Cove finally sold a couple of weeks ago, although the buyer’s identity is still under wraps.

Despite the financial windfall, one retiree in Lane Cove, who has lived at his house for nearly five decades, says he is unhappy with the arrangement.

Nevertheless, he has agreed to sell.

“I have to go with the flow, I didn’t want to be isolated,” says the house owner.

“But all my friends have gone. You can’t stay with high-rise apartment blocks all around you.”

The two Lane Cove streets, 2-22 Birdwood Avenue and 11-15 Finlayson Street, comprise about 10,400sqm and form an irregular T-shaped development site.

The amalgamated site has development approval for four buildings of up to seven levels, as well as significant underground car parking. It has been marketed as part of the Lane Cove Village.

Selling agents say demand for apartments within the village area comes from all buyer profiles, including first-home buyers, young professionals, local and offshore investors, upgraders and downsizers.

The site was sold by CBRE agents Matthew Ramsay and Ben Wicks several weeks ago. The agents declined to comment.

In nearby Epping, eight residents reportedly banded together, selling their houses for more than $30m — even though their houses were worth about $1.23m each.

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Inner-city boom to see the suburbs bloom for spring buyers
THE AUSTRALIAN AUGUST 23, 2014 12:00AM

Greg Brown

Property Reporter
Sydney
BUYERS are expected to push into more affordable suburbs in the spring selling season as booming inner-city price growth leaves many areas out of reach.

Sydney will drive the national housing market in the busiest season for buyers and sellers, with the most action likely in the western suburbs of Bankstown, Campbelltown, Macquarie Fields and Mount Druitt, said Australian Property Monitors senior economist Andrew Wilson.

Melbourne’s inner-city apartment frenzy is expected to cool as buyers head to cheaper outer suburbs such as Melton, while Perth will see a resurgence of first-home buyer activity in the southwest.

“There is a move towards value again, which is pushing buyers into those markets in the outer-western suburbs because it is so expensive in the inner city,” Dr Wilson said. “Affordability barriers have kicked in in Melbourne, Perth and, to a degree, Sydney.”

INTERACTIVE: Home prices on the rise

However, Brisbane will buck the trend and the inner-city apartment market is expected to have a strong spring season.

Dr Wilson forecasts national home prices will rise by about 5 per cent in the year to June next year, a growth rate about half that of the past 12 months. Nearly all cities will have slower growth, with Sydney values to rise 7 per cent, compared with 16.3 per cent in the 2014 financial year.

Investor activity is at near-­record levels in Sydney, accounting for 58.5 per cent of the city’s home loans by value in June, at $5.1 billion.

Price growth in Melbourne will halve, from 9.3 per cent in the 2014 financial year to 4 per cent in the 2015 financial year, while price growth in Brisbane is forecast to be relatively steady at 6 per cent, followed by Adelaide (5 per cent), Perth (4 per cent) and Hobart (3 per cent).

Canberra and Darwin will turn in improved performances, at 4 per cent and 5 per cent respectively, this financial year.

HSBC Australia and New Zealand chief economist Paul Bloxham said the national housing market was still in boom mode on the back of record low interest rates. But he sees a potential worry in Sydney.

“I think people need to be very careful about the Sydney market because it is already running very hot and (it could soon) start to run ahead of itself,” Mr Bloxham said.

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Loan approvals and turnover the key indicators of housing market
CALLAM PICKERING BUSINESS SPECTATOR AUGUST 23, 2014 12:00AM

FEW measures of the housing sector are more valuable than loan approvals and dwelling turnover. Both measures — operating as a proxy for housing demand — provide important insight into the health and potential direction of the property market.

Property upswings are almost always associated with a strong rise in lending and property sales. The relationship doesn’t always hold as cleanly as analysts would like — shifts in the composition of buyers and lenders can temporarily affect the relationship between prices and sales. But the occasional false signal is a small price to pay to identify shifts in Australia’s $5 trillion housing market.

Loan approvals and dwelling turnover track each other closely, but not without some significant complications. Dwelling turnover data is not particularly timely, owing to the considerable lag between when a sale is made and when it is officially reported by each state’s valuer-general.

Useful estimates of dwelling turnover are typically available about three months after the reference period, but it often takes more than six months before all sales are officially reported. And reporting differs significantly by state; for example, property sales in South Australia are collected and reported more efficiently than in Victoria.

As such, the most timely measure of housing demand is the Australian Bureau of Statistics’ monthly lending finance data. Unfortunately, mortgage approvals have their own issues.

First, not every property buyer takes out a mortgage. According to the HILDA survey, between 20 per cent and 30 per cent of all property sales are conducted without taking out a loan. Obviously those figures differ considerably with age; for example, only 20 per cent of purchases by households where the main breadwinner is over 55 feature a mortgage.

Second, there is considerable double counting in estimates of loan approvals. It is not unusual for prospective buyers to receive loan approvals from a range of banks before making a decision.

Third, just because you receive an approval doesn’t mean than you actually receive a loan. Cancellations can and do occur, creating some bias to the data.

Fourth, there is no measure for the number of investor loan approvals. The ABS only reports the value of investor loans but it isn’t too difficult to come up with a reasonable estimate.

Fifth, it does not capture foreign purchases. This category has been rising in recent years — although legally foreigners are not allowed to buy existing property — but on a whole it remains a fairly small share of total activity.

Double counting and cancellations create some upward bias to the lending figures, which is partly offset by the fact that about 20 to 30 per cent of property sales do not involve a loan. Despite the competing biases, loan approvals and dwelling turnover track each other pretty well

On a trend basis, dwelling turnover peaked late last year and has eased somewhat through to March. Early estimates of turnover in April and May suggest that demand may have softened a little more.

The number of loan approvals has also eased in recent months, although the value of loan approvals continues to rise. Investors have driven most of the recent growth and continue to underpin the property upswing.

The indicators suggest that the pace of house price growth has peaked, with the current upswing relatively minor compared with the 2009 boom. Consistent with this, annual house price growth eased to 10.1 per cent (from 10.9 per cent in the March quarter).

Lending activity has been elevated and historically has struggled to maintain this type of momentum for long. But could greater foreign demand keep the market ticking along?

The recent property boom has been centred in Sydney and Melbourne. It is possible that stronger growth in the other three cities could offset the expected decline from Australia’s two biggest cities — although for now the Perth and Adelaide markets remain weak.

I suspect that none of those factors will stop prices declining significantly over the next couple of years, with Brisbane poised to be the best performing city. What remains uncertain is whether that correction will be similar to recent downturns — nominal prices down 5 per cent; real prices down 10 per cent — or part of a more significant correction as Australia adjusts to life after the terms-of-trade boom.

Loan approvals and dwelling turnover provide a great deal of insight in the cyclic triggers for the housing market. At the moment they suggest that the market is close to its peak and may start to ease before the end of the year.

But we shouldn’t place too much faith in these measures because they don’t, for example, provide insight into the longer-run drivers of the property market.

Callam Pickering is the economics editor at Business Spectator.businessspectator.com.au

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Desperate landlords compete for tenants

Rebecca Thistleton
627 words
23 Aug 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
City living Picky renters call the shots as apartment supply outstrips demand.

Rising apartment construction has tipped the rental market in tenants' favour, while rising prices and ­vacancies stymie investor yields.

Low interest rates, strong property sentiment and offshore investment has sparked an investor-driven apartment boom in the capitals.

Offshore buyers are only allowed to buy new property, and combined with state government stamp duty incentives for new builds, have fuelled demand for inner city, off-the-plan apartments.

New unit completions have soared and, combined with rising purchase prices, have led to depressed yields.

"It really is a time for renters; agents said that themselves," said Melbourne renter Jaan Simpson, who has moved into a three-level, three-bedroom townhouse in Collingwood for $780 a week.

He and his flatmates were initially dubious at the price as it was lower than expected for its location, quality and size, but found there was little competition for the 20 properties he inspected.

"A lot of the time there would be hardly anyone else at the inspection and agents would be calling back later to follow up. One offered to talk to the owner about dropping the rent."

Two years ago, when there was less stock, Mr Simpson was inspecting properties with a pack of other competing rental hunters. He was trumped for a St Kilda property after the successful applicant offered to pay a year's rent in advance – more than $33,000.

Now it is the landlords competing, according to Harcourts Victoria chief executive Sadhana Smiles, who said Melbourne's apartment spike meant vacancies would continue to rise. One and two bedroom units were in highest supply, she said.

'Tenants can be picky'"Tenants can be picky – they can look at an apartment but find others which are exactly the same and offer $10 a week less."

Apartment supply has risen in the major capital cities, where prices had also climbed in the past 12 months.

SQM Research director Louis ­Christopher said there was still room for more capital gains over the next 12 months, which meant yields would continue to soften.

"Generally, investors do purchase for the long-term capital gains and the rent offsets their costs, " he said.

The trend extends to Sydney, which has a tight rental market, especially around the city. Yields in Surry Hills were about 4.4 per cent. The suburb's vacancy rate was still only 1.3 per cent, but agents had found it difficult to fill apartments.

Belle Property Surry Hills senior property manager Jaime Pratt said: "The past two or three months have been challenging. There is a lot of two-bedroom stock on the market.

"It comes down to tenants and ­pricing. If the asking rent is realistic we can still fill it, but investors who have paid a high price can be pretty ­disappointed if they can't get the yield they were expecting."

Mr Christopher said the outlook for Sydney and Melbourne was still ­positive but weak labour markets in Canberra and Perth meant their rental marks were likely be in the doldrums for some time.

In Canberra, elevated apartment construction, weak property sentiment and job losses sparked by the federal budget, have led to landlords being whacked with falling yields and lower asking prices over the past year as more rental stock floods the market.

Norm Honey, managing director of the Independent Property Group's property management arm, said new stock was being absorbed but older rental stock was suffering.

"It's a good market for tenants at the moment, we expect things to remain steady until November and December this year, that's when more tenants will be out and looking," he said.


Fairfax Media Management Pty Limited

Document AFNR000020140822ea8n00023

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Rental boom days are over

Property observed Robert Harley
742 words
21 Aug 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Robert Harley

Harry Triguboff, the billionaire chairman of Meriton Apartments, is candid about the rental growth in the nation's largest apartment portfolio.

"Rents are not going up," he says. "They have not been going up for two years."

The Meriton portfolio is focused on Sydney, and to a lesser extent Brisbane. But it should be a warning to all existing and potential investors.

The strong rental growth of the past cannot be expected in the future.

Just as investors protect against rising interest rates, so they should budget for possible falling income.

And they need to be proactive. Tenants now have choice.

"The market is more discerning; owners have to understand that they need to keep their properties in good shape," Triguboff says.

They also need committed managers. "We don't allow outside agents to lease," says Triguboff.

The slowdown in rental growth, coupled with the strong price rise of the past two years, has also cut into the yields on rental property.

Yields on apartments in Perth and Canberra have dropped by 50 basis points in the past year, says Fairfax Media's Australian Property Monitors.

Some will argue that the slowdown in rental growth and the fall in yields foreshadows weakening investment demand and a lower price growth.

But it is not that simple. Yields on all income-producing asset classes are falling as investors come to accept a new low interest rate, low return, financial environment.

Real cash returns on Australian housing have always been low. It's a popular, tax effective, and inflation-linked investment.

Owners who were happy with a 4.9 per cent gross return on a Sydney apartment in June 2013 – as calculated by Australian Property Monitors – may still be happy with the 4.7 per cent return of June 2014. "Interest rates have dropped dramatically and rents are still the same; investors are better off," says Triguboff.

House prices are still growing solidly in Melbourne and Sydney. The Reserve Bank minutes from its August meeting said the "established housing market remained strong".

Only in Perth has the slowdown in rents, and the sharp rise in yields, so far led, as in classic theory, to a slowdown in house sales and prices.

Melbourne and Sydney investment housing also has a wild card. No one knows how many offshore investors are buying with no regard to return, but to park money in empty property. In the UK it is called buy-to-leave.

Rents did not grow at that pace during the 1990s. And they are clearly not growing at that pace now.

In some places they are falling. In the high-rise towers of Melbourne's Southbank and Docklands, rents are soft. In the once booming mining markets, like Karratha in the north-west or Moranbah in central Queensland, they have collapsed.

Rental housing is like every market; it shifts with supply and demand.

Louis Christopher, managing director of SQM Research, says metropolitan rental markets have stalled due to changes in both demand and supply.

He says that despite population growth, demand is not increasing. Renters are turning into first-home buyers, or after the big rises in rents, and in the face of tougher economic conditions, they are crowding into smaller accommodation, or staying in the family home longer.

At the same time, supply of new housing is rising.Those dynamics are slightly different around the country.

BIS Shrapnel has long warned about the danger of oversupply in inner-city Melbourne, where 6000 apartments a year are being added to a market with capacity, according to BIS, of just 4000.

"There is a danger of a spillover of excess supply in the Docklands and the city and Southbank," says BIS managing director Robert Mellor. "Our fear is that landlords outside the inner city will have to drop rents to compete with the inner city," he says.

Mellor is also worried about Perth, which is likely to have a big swing in population growth as resources investment and migration tapers.

He is less concerned about Brisbane, although rental growth will slow as renters become first-home buyers. And in Sydney the big surge in new apartment completions is still 2½ years away.

Of course the slowdown in rental growth has lots of upside. It's good for tenants. Ultimately that is a positive for the economy of the cities.

rharley@afr.com.au


Fairfax Media Management Pty Limited

Document AFNR000020140820ea8l00064

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Chinese investor frenzy adds fuel to inner-city apartment boom

THE AUSTRALIAN AUGUST 25, 2014 12:00AM

Greg Brown

Property Reporter
Sydney
Chinese Property Buyers Story
Property concierge Monika Tu specialises in selling homes to Chinese buyers coming from overseas. Source: News Corp Australia
THOUSANDS of Chinese investors piled into a property expo in Sydney’s Town Hall at the weekend as analysts tipped overseas buyers would keep the city’s inner-city apartment market booming for the next two years.

About 50 companies jockeyed for the attention of the cashed-up Chinese buyers, with apartment projects being spruiked by development giants Greenland Holding Group, MAB Corporation and Frasers Property Australia.

The property frenzy came as Sydney and Melbourne kicked off the spring auction season with strong results, posting clearance rates of 83.4 per cent and 75.3 per cent respectively on total sales of $545.7 million, according to preliminary figures released by Australian Property Monitors.

“The (auction) results were extraordinarily strong,” said APM senior economist Andrew Wilson. “The Sydney market just keeps rising. Certainly there is no sign of a waning of activity.”

He said a lot of the buyer ­action was driven by investors rather than owner-occupiers.

At the Sydney property expo Maggie Wang bought a house in Bellevue Hill, in Sydney’s east, for about $6m.

Ms Wang, who migrated three years ago, ran an IT and property development company in China and had recently started a wedding planner business in Australia. She said Chinese interest in Australian property was about more than just making money.

“People like the lifestyle, the country and the environment, it’s not just about investment,” Ms Wang said.

Another buyer, 26-year-old Crystal, bought a home in one of Sydney’s wealthiest suburbs, Vaucluse, for more than $5m, with plans to buy more Australian investment properties.

The expo also featured agencies, such as ABC World, which give Chinese investors advice on migrating to Australia through avenues such as the Significant Investor Visa. The visa, implemented by the former federal Labor government, allows foreigners who invest more than $5m in Australia the potential for permanent residency.

Black Diamondz director Monika Tu, who represents wealthy Chinese looking to buy Australian homes, said the visa’s introduction had led to a surge in interest for local trophy homes worth more than $5m.

Ms Tu said inquires to her agency from Chinese property hunters had increased by about 50 per cent this year.

Also at the expo, one of China’s largest developers, Greenland Holding Group, held expressions of interest for its second local project, the $200m ­Lucent apartment tower in North Sydney, while Singaporean-backed Frasers Property Australia marketed apartments at its $2 billion Central Park project at Sydney’s inner-city Chippendale.

The high investor demand for off-the-plan apartments is ­expected to keep Sydney’s inner-city market in boom mode for the next two years, according to forecaster BIS Shrapnel.

BIS Shrapnel said about 5800 apartments were under construction in Sydney while about 11,500 new apartments would be completed over the next three years — the biggest number in the city’s history. CBRE managing director of residential projects David Milton said the uplift in interest from Chinese investors allowed local apartment developments to stack up financially.

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CHRISTOPHER JOYE
Houses overvalued by up to 30 per cent, says ex-RBA official

Houses overvalued by up to 30 per cent, says ex-RBA official

House prices are 26 per cent above their peaks before the financial crisis, says RP Data. Photo: Louise Kennerley
CHRISTOPHER JOYE
KEY POINTS

Former RBA economist says regulators are not doing enough to curb price rises.
He says the country’s debt position means any global shocks will take a major toll.
One of Australia’s top economic experts, Jeremy Lawson, says the ­housing market is 20 per cent to 30 per cent overvalued and has left Australia vulnerable to a big international ­economic shock.

Mr Lawson is the global chief ­economist of Standard Life, a massive British fund manager with $460 billion in assets under management. He was previously a senior economist at the Reserve Bank of Australia and the OECD, and in 2007 advised then ­opposition leader Kevin Rudd.

In an interview, Mr Lawson ­criticised fiscal policy settings, ­suggested the RBA’s organisational ­culture was insular and said there was a bias towards big banks in the financial system inquiry panel and argued low interest rates are pushing house prices out-of-line with fundamentals.

As an economist focused on investing Standard Life’s capital around the world, Mr Lawson said he can take a longer-term view than “sell-side” counterparts inside investment banks, who have to relentlessly promote new angles to clients and the media in a battle for attention.

Mr Lawson said it is “reasonable to assume that future house prices will grow in line with real household ­disposable income as the commodity boom unwinds”.

“That would imply overvaluation of between 20 per cent and 30 per cent,” he said, based on a new valuation model released by the Reserve Bank in July.

House prices are 26 per cent above their peaks before the financial crisis and 11.2 per cent higher over the 12 months ended August 23, RP Data said. Prices in Sydney and Melbourne have surged over the last three months.

REGULATORY RELUCTANCE
Mr Lawson said valuation ­distortions have been fuelled by easy monetary policy and regulators’ ­reluctance to use so-called macro-prudential tools to slow price growth.

“Overall financial conditions have probably been too loose and that has undermined longer-run financial ­stability,” he said. “Part of the problem is that rates are being relied on to do too much work. Given the risks, I would like to see the RBA and APRA make much more active use of ­macro-prudential instruments. That way you can have both low rates to support the overall economy while maintaining tighter credit conditions for riskier sectors.”

The RBA has repeatedly said there are no signs of a brewing price bubble because annual housing credit growth of over 6 per cent is not a concern.

Mr Lawson said it was dangerous for the Reserve Bank to focus too much on the credit growth rate rather than the amount of credit. Housing credit growth is more than twice wages growth and has pushed the household debt-to-income ratio to over 150 per cent, just below pre-crisis heights.

“A high debt-to-income ratio leaves households much more vulnerable to income and interest rate shocks,” Mr Lawson said.

His biggest fear for the economy is a sharp slow-down in Chinese growth.

“The Australian economy is highly leveraged to a very unbalanced economy and if China experiences a sharp economic downturn, Australia’s fiscal position will deteriorate substantially.

“The painful choices governments will need to make at that time will make the ruckus over the May budget look like a minor skirmish.”

This vulnerability has been exacerbated because “governments badly managed the commodity price boom”.

“While our public debt metrics are much better than most other OECD countries, that masks a significant ­deterioration in Australia’s structural fiscal position over the past decade that has left us very vulnerable to the next big global shock,” Mr Lawson said.

He does not pull his punches when it comes to David Murray’s Financial ­System Inquiry or his former RBA ­colleagues either.

“The biggest cultural and ­organisational challenge the RBA faces I think is avoiding group-think,” he said.

“Very few RBA executives are recruited from the senior levels of other public sector, academic, or private ­sector organisations, which contrasts with other central banks. While the RBA has served Australia very well, there would be some benefit in appointing more outsiders to senior roles.”

INDEPENDENT SCRUTINY
The RBA had the government exclude the conduct of its monetary policy, which was reformulated in the early 1990s, from the Murray inquiry.

Mr Lawson said “in a ­democracy it is vital that there is some public scrutiny of otherwise independent institutions like central banks”.

“There should be scope for a ­separate review of the RBA’s policy framework if it is done in a rigorous and balanced way.”

In recent years the RBA has been embroiled in a corruption crisis at one of its wholly-owned subsidiaries.

On the Murray inquiry, Mr Lawson said the panel “should have been ­balanced by the inclusion of more independent experts” in addition to the former bosses of CBA, Westpac and AMP. He implored it to consider “more vigorous competition tests” across the financial system and recommend explicitly charging for “the implicit ­too-big-to-fail subsidy the major banks enjoy”.

Mr Lawson questioned the ­long-standing RBA principle there is a trade-off between stability and competition, which it has used to defend the dominance of the four big banks.

“The international evidence that a concentrated banking sector is necessarily better for financial stability is fairly weak. Australian authorities need to think carefully about whether the supposed stability gains are worth the ­inefficiencies that a concentrated ­banking sector generates.”

Mr Lawson was also worried about the impact of the growing polarisation of foreign affairs on financial markets.

“The breakdown in the relationship between the West and Russia could have particularly deleterious ­consequences for global security and conflict resolution,” he said.

“We appear to be moving into a much more multi-polar world, where the dominant power is more reluctant to involve itself in foreign conflicts. That could mean that bouts of geopolitical risk and uncertainty become more common.”

The Australian Financial Review

BY CHRISTOPHER JOYE

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Reserve Bank takes aim at mortgages
THE AUSTRALIAN AUGUST 28, 2014 12:00AM

Michael Bennet

Reporter
Sydney

THE Reserve Bank has issued its sternest warning yet about allowing more funds to flood the property market, urging any moves that could further fuel lending be carefully considered due to the increased risks to the economy.

Amid growing tensions surrounding the Murray financial system inquiry, the central bank railed against mooted policies that could radically alter the $1.3 trillion mortgage market, including how banks assess the riskiness of a loan.

While the RBA’s stance is a blow to smaller banks lobbying for relief on mortgage rules, the big banks’ aggressive push against the prospect of having even more higher overall capital ratios — and lower returns — also took a hit given the RBA’s clear focus on improving stability.

“Changes in capital requirements have been to the benefit and detriment of shareholders,” said BBY analyst Brett Le Mesurier. “(But) I would think if anything you’d want to be more careful about it (lowering the regionals’ capital held against mortgages) ... because of the run in the mortgage market.”

The RBA, which is closely eyeing lending standards, also called on the inquiry to consider limiting leverage in self-managed superannuation funds to make property price cycles less volatile.

In its interim report, the inquiry warned that the almost doubling in household leverage since 1997 and sharp growth in the banks’ mortgage books to 66 per cent of assets had increased systemic risk.

The inquiry, being led by former Commonwealth Bank chief David Murray, this week took final submissions and will report recommendations to the government in November.

“The supply of mortgage fin­ance in Australia is ample,” the RBA said in its final submission. “The interim report raises a number of options in the context of competition in the mortgage market that, if implemented, could result in relatively more fin­ance being directed towards housing.

“Relevant considerations include whether the policy change might accelerate household borrowing, and the associated implications for systemic risk and the available funding for Australian businesses.”

The Australian Bankers Association this week upped its defence against the Murray inquiry, arguing that the surge of housing finance and debt had been based on strong economic growth and employment.

The RBA’s moves may be seen as trying to “jawbone” the property market down amid an 18-month price boom, after its submission rejected the alternate use of so-called macroprudential rules such as capping the banks’ lending of riskier loans.

In final submissions, the smaller regional banks, including Suncorp, and the credit unions demanded that the inquiry change the rules surrounding “risk weightings” of mortgages to improve competition.

After investing in “advanced” modelling systems, the big four banks can put aside about a third less capital than the regionals to write the same underlying mortgage, giving them pricing power, or a higher return. Smaller banks must use a “standardised” approach and want the minimum risk weighting lowered to 20 per cent, down from 35 per cent.

The regionals cited how 29 per cent of CBA’s housing book was risk-weighted at just 2.9 per cent, or 26c of equity against every $100 in loans.

But many experts are concerned about the banks’ leverage — the banking regulator this week revealed total assets had grown to $4 trillion — that is backed by just $207bn of capital.

Referring to the risk weights debate, the RBA said changes on competitive grounds “should not come at the expense of greater risk, and should not amount to a weakening relative to global regulatory minima”.

The ABA­ backed looking further at the risk-weighting “gap” between standardised and advanced approaches.

Smaller banks also reiterated the inquiry should better protect taxpayers against the big four being “too big to fail”, including by “bailing in” debt holders when lenders collapse and increasing the banks’ holdings of top-tier capital. The RBA rejected bail-ins, given few have yet been tried globally, and also “ringfencing” riskier banking operations, citing banks’ small trading operations.

The big four banks this week upped their defence against higher capital requirements, after the inquiry’s interim report labelled them “middle of the pack” globally. Using data supplied by the banks, the ABA hired PwC to produce a report showing the big four’s capital levels were at or above the 75th percentile globally.

The ABA labelled the inquiry’s judgment of the big four’s capital “incorrect”, adding that the regulator had imposed stricter implementation of the global Basel III rules.

In contrast, the banking regulator this week said the major banks had the lowest common-equity tier-one capital ratios of the sector at 8.6 per cent, compared with 16.6 per cent for building societies.

The big four already have to hold common-equity tier-one ratios of at least 8 per cent by 2016, which they claim is high and some like NAB and ANZ are under pressure to achieve given looming headwinds.

In another blow, the RBA also rejected deeming residential mortgage-backed securities high-quality liquid assets under the new Basel III requirements.

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Call for Australian banks to ration credit
THE AUSTRALIAN AUGUST 28, 2014 12:00AM

Damon Kitney

Victorian Business Editor
Melbourne
A new toxic threat for Europe
http://cdn.newsapi.com.au/image/v1/exter...z9c5xuj3mc
A TOP international investment strategist believes that Australian banks need to start rationing ­credit to avoid further inflating a housing bubble and “extend the boom’’.

Paul Schulte of Schulte Res­earch International, a Hong Kong-based independent research house focused on banks and corporate credit in emerging markets, claimed leverage levels in Australian banks were “getting very high’’.

The comments come as new figures released by the Australian Prudential Regulation Authority show big banks were lending to riskier segments of borrowers at a faster rate than the market’s overall growth.

Mr Schulte, formerly Bank of New York Mellon’s head of investment strategy for Asia Pacific and a former Lehman Brothers executive, said rationing credit “would be a very wise move right now’’ for the banks.

“The leverage levels in the Australian banks are getting very high, whereas in the crisis they were low and Australia was looking great. Now they are some of the highest in the world and the loan-to-deposit ratio is very much on the high side,’’ he told The Australian on the sidelines of the ADC Forum’s recent Australian Leadership Retreat.

“If there is any sort of disruption in the world it is important for the Australian system to be able to slow down the pace of credit growth and ration it. That will spread out the property price ­appreciation, it will extend the boom.’’

Mr Schulte’s comments come after the Murray Inquiry interim report found that housing debt represented a “potential source of systemic risk for the financial system and the economy”.

According to quarterly APRA data, the domestic home loan market expanded to $1.23 trillion by the end of June, up 2.5 per cent from March and 8.6 per cent on a year ago. But loans held by investors — considered riskier because they are more vulnerable in a downturn — rose to $413.5 billion, up 3.3 per cent from March and 10.9 per cent ahead of the previous year.

In addition, ANZ, Westpac, Commonwealth Bank and NAB grew their interest-only mortgages 12.8 per cent from the previous year to $369bn and have approved an additional $7bn in the past three months.

The big four, which are deemed “systemically important” by APRA, also increased approvals at loan-to-value ratios above 80 per cent by $2.2bn in the past quarter.

CBA this month said signs of a bubble, such as rapid credit growth, were not evident and interest from investors was a “rational response” to low interest rates.

But Financial System Inquiry chairman David Murray has expressed concern about the banks’ rise in exposure to housing since the last inquiry 17 years ago.

He has flagged requiring the major banks to hold more capital to protect taxpayers from them being “too big to fail” and better safeguard the economy

Home loans make up two-thirds of bank loans in Australia and ratings agency Moody’s said recently that Australian lenders had sold $3bn worth of non-conforming or sub-prime home loans over the last 18 months.

“If you just slow down credit, either by doing it directly through interest rates or do what many central banks are doing in terms of putting curbs on the banks to how they can allocate credit. That has happened in Hong Kong, China, Korea and Singapore, but not Australia,’’ Mr Schulte said.

“That would be a very wise move right now. To extend the boom by rationing credit rather than allowing credit to exhaust itself too quickly.

“That is when you get into real problems — when credit is extended too quickly and it tends to go into unproductive purposes like real estate.’’

Last month, Industry Super Australia released research showing the banks were lending less for commercial endeavours, and more for the purchase or refinancing of existing housing, over the past two decades.

It showed the volume of commercial lending per dollar of housing-related lending has fallen from $3.84 to $1.62 over the last 25 years.

But Commonwealth Bank chief executive Ian Narev questioned this month why there was a disproportionate focus on housing debt in isolation from other vulnerabilities in the system.

Mr Schulte, who was also the global head of financial strategy and Asia banks research at China Construction Bank, is known for his controversial calls on Australian banks.

Last year he said Australia should have much higher interest rates, a claim critics said ignored the stable nature of the banking system.