Australia Property

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Chinese demand for loans lifts Aussie firm
22 Oct5:50 AM
Sydney

ALMOST a third of the home loans written in September by a mortgage provider part-owned by Macquarie Group were to Chinese investors, the chairman of the firm said.

Yellow Brick Road Holdings, 18.4 per cent owned by Macquarie, lent A$320 million (S$359 million) to Chinese investors out of a total A$1.1 billion in disbursements last month, Mark Bouris said on Tuesday in Sydney. The proportion of Chinese borrowers has doubled in the past year, he said.

Australian lenders and property developers are gaining from surging demand out of China, where the housing market is faltering. Chinese purchasers overtook Americans to become the biggest buyers of real estate in Australia in the 12 months through June 2013, plowing A$5.9 billion into commercial and residential property, a 42 per cent increase from the previous 12 months, according to the Foreign Investment Review Board.

"The foreign investment loans have been a feature in the past seven to eight months," Mr Bouris said. "It's a big ratio at the moment and we get them verified in China with facilities we have. They are supporting new developments."

Yellow Brick Road's Chinese customers tend to borrow only about half of a property's value, paying the rest up front, he said. There haven't been any signs of arrears building up on the loans, which are in the range of A$350,000 to A$750,000, according to Mr Bouris. Following the recent expansion, growth is now flattening out, he said.

Outstanding Australian mortgages climbed 6.7 per cent in the year to Aug 31, the fastest pace since February 2011, according to Reserve Bank of Australia data. Dwelling prices, pumped up by the RBA keeping its benchmark interest rate at a record low 2.5 per cent for more than a year, climbed 9.3 per cent across the country in the 12 months through September, according to the RP Data CoreLogic Home Value Index.

The rise in prices and an increase in investor activity prompted the central bank to say on Sept 24 that it is discussing possible measures with other local regulators to strengthen lending practices. RBA assistant governor Malcolm Edey said on Oct 2 that he expects a preliminary announcement on actions that banking supervisors may take before the end of the year.

The Australian Prudential Regulation Authority, which regulates the banks, altered mortgage verification standards about six months ago, Mr Bouris said. APRA wanted lenders to pay closer attention to a potential borrower's job tenure and savings pattern, he said.

Yellow Brick Road has arranged mortgages worth about A$27 billion, with 40 per cent of the volume on Macquarie's books and the rest through other lenders, he said. Australia had A$1.3 trillion in outstanding mortgages as at Aug 31, according to RBA data.

If Sydney home prices continue to grow by more than 10 per cent a year, the government will probably try to slow down the housing market, Mr Bouris said.

Australian lawmakers are also conducting an inquiry into foreign buying of Australian residential property. They are seeking to determine, among other things, whether foreign investment in real estate is causing distortions and making housing less affordable.

Mr Bouris said that demand from offshore buyers is good for the Australian economy, contributing to a housing boom that's creating jobs.

"The builders are busy, plasterers are busy, bricklayers are busy, suppliers are busy, real estate agents are busy, lenders are busy," he said. "It's actually not a bad market." Bloomberg

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Reserve Bank accused of property investor U-turn
AAP OCTOBER 22, 2014 1:52PM

NSW’s peak real estate body has accused the Reserve Bank of doing too little too late to curb risky lending to property investors.

The Real Estate Institute of NSW (REINSW) says it’s disappointed that the central bank has recently issued warnings about imbalanced investor activity in the property market.

Within the space of six months, RBA governor Glenn Stevens had gone from encouraging property investment to criticising it, REINSW president Malcolm Gunning said.

“Six months ago, Mr Stevens was encouraging investment in real estate,” Mr Gunning said.

“Now that the public is buying properties with confidence, the RBA has changed its mind and is being critical, giving warnings about investing in an over-inflated market.”

Mr Gunning said the RBA was well aware of the impact low interest rates would have on the property market when it began cutting the cash rate in 2011, and yet was only now talking about curbing risky lending to property investors.

“We’re of the opinion that the RBA let it run, the banks obviously got all the money out of it, the taxes have been enjoyed by both state and federal governments, and then they put the warning out after the horse has bolted,” Mr Gunning said.

“Why didn’t they do it earlier? Why wouldn’t you foreshadow it upfront, and be a little bit more discerning?

“There should have been measures put in place knowing that the property market was going to scoot.”

Mr Gunning said restrictions on loan-to-value ratios were needed and had they been introduced earlier, many speculative investors would have been kept out of the market.

The RBA in September said it was worried about soaring house prices and rapidly growing investor activity, warning it could pose a risk to the economy.

It warned banks to be cautious with home loans and said it had begun talks with the Australian Prudential Regulation Authority about making sure lenders stick to sound lending practices.

But RBA deputy governor Philip Lowe yesterday sought to allay possible fears, saying the potential changes to lending rules would not be heavy-handed.

AAP

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Ending negative gearing will hurt rental stock, Mirvac boss warns
THE AUSTRALIAN OCTOBER 23, 2014 12:00AM

Turi Condon

Property Editor
Sydney

Mirvac Group CEO Susan Lloyd-Hurwitz says tightening the regulation for offshore buyers will help take the heat off the housing market. Picture: Renee Nowytarger Source: News Corp Australia

THE use of regulatory levers by the Reserve Bank would help ease overheated parts of the housing market, but limiting negative gearing tax breaks for investors would pose serious risks to the stock of rental properties available, according to Mirvac Group chief executive Susan Lloyd-­Hurwitz.

Tightening Foreign Investment Review Board regulation of offshore buyers and an additional stamp duty levied on foreign investors would slow superheated parts of the market, Ms Lloyd-Hurwitz told The Australian.

“(But) as a society, we would have to think long and hard about the removal of negative gearing because it has very far-reaching implications.”

The RBA warned again this week on the risks, as investors stoke housing prices, and continued to flag that it would join with financial regulators to take “modest” action.

Meanwhile some analysts and commentators have called for a rethink on negative gearing to tackle housing affordability as price growth in Sydney hit 15 per cent in the year to September.

“We need rental stock and it’s currently owned by mum-and-dad investors, negatively geared,’’ Ms Lloyd-Hurwitz said, noting that, unlike the US, Australian institutions and listed companies did not invest in housing.

“Where does the housing stock come from for the rental market?” she questioned, if small investors retreated from the ­sector.

Foreign developers, who have forged into the Sydney, Melbourne and Brisbane markets, were selling their new projects offshore and a proportion may not be rented locally.

“It’s hard to visualise how that plays out. I don’t think they permanently replace the mum-and-dad investors who negatively gear their investment flat,” she said.

Ms Lloyd-Hurwitz, head of one of the country’s biggest residential developers, said years of chronic under-building in Sydney and to a lesser extent Melbourne would underpin the cities’ housing prices for another two years. But the days of soaring price growth in the two capitals were numbered. “We believe that is unsustainable,” Ms Lloyd-Hurwitz said. “We would expect house ­prices to increase in the mid- to single-digits for the next couple of years.”

Buyers were much more sensitive to rising interest rates and the velocity of the rise rather than to the absolute level of rates, she said.

Ms Lloyd-Hurwitz characterised the economy as in a “very shallow rate of recovery”, saying that this would keep interest rates lower for longer and put a floor under housing prices. “We are ­really trying to take advantage of the market conditions and get stock into the market,” she said.

Mirvac will release 2700 housing lots in the 2015 financial year, substantially more than in previous years, she said.

Developers had rushed into certain parts of the market. Inner city investor units in Melbourne were already in oversupply, she said. “Think the back of Southbank, no car park, one bedroom or studio-type apartments. We don’t operate there,” she said.

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Chinese investors still ambitious

Matthew Cranston
698 words
23 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Dalian In a magazine at a hotel in the northern Chinese city Dalian, there is a map charting the city's district, not much bigger than Brisbane.

In the ensuing 30 pages, there are 240 residential projects advertised for sale, eight to a page, each in a separate box like the betting table for a game of roulette.

After crunching a few sums, it hits you that you are looking at more than $120 billion in residential developments or about 20 times Lend Lease's Barangaroo project in Sydney.

A typical project is the 350,000 square metre Golden Sea with more than 3500 apartments spread over a few dozen high rise towers. They have all been built and are now for sale at $1500 pa square metre (roughly 40 per cent of the average annual income of a Dalian resident).

The sheer scale of development in ­Dalian, and the risk associated with it, is unfathomable for many Australians.

Even experienced developers are blown away by its enormity.

Brisbane developer Don O'Rorke, who sold a Gold Coast property development to Chinese group Golden Horse Nine Dragon Lake Holdings, has recently travelled throughout China and was astounded at the growth and scale of development.Bogans don't know

"If you are unaware of the sheer scale and speed of the Chinese developments, then you are now considered a bit of a bogan," O'Rorke says.

"Their capacity to bring about such massive supply is amazing. Their presence in Australia and ability to speculatively build hundreds of apartments will no doubt have an impact on our market and local developers."

These massive Chinese developers are already on their way, with local Dalian developer Wanda, owned by China's second richest man, having already committed $1.7 billion to the Australian real estate market.

In an interview with the Development and Reform Commission of the Dalian government, there is mention of more expansion overseas.

"Because of the encouraging policy of the central government for private enterprises to go global, the overseas investment is expanding," the government's spokesman on trade says.

"Many enterprises from Dalian have begun to invest in other countries, including Australia."

In June, the central government issued a new policy helping to speed up the approval for overseas investment.

But when developers start to head offshore to find new markets, questions are inevitably raised about whether their own markets have cooled. There are most definitely some signs of this.City of lights

At 6 o'clock at night, the lights of the apartment towers in Dalian tell an interesting story.

In these seemingly endless ­mini-Manhattans, towers are fully lit and occupied. Then you can see the towers where there is a haunting absence of light, except for a few floors or a solitary red beacon on the top level.

Trying to work out the vacancy rate in Dalian, which was one of the first 14 ­Chinese cities to be opened to the outside world in 1984, would seem a fool's game.

Trying to establish the level of available supply would also seem fraught, and working out demand even more difficult, considering the influence of a socialist government that automatically takes over the ownership of the apartment 70 years after purchase.

Regardless of all these moving parts, not to mention the problems with the country's impaired loans (former US Treasury secretary Tim Geithner is now wheeling and dealing in this market), there are plenty of stakeholders who want to keep building big in China.

The vice-director of the Economic Development Bureau of Dalian Puwan New District, Sha Yankan, is waiting on final approval from the central government to build $18 billion worth of infrastructure for a new city north of Dalian. It is one of 10 similar plans throughout China, and Sha Yankan is confident it will proceed. "The central government will support this and the central bank will give priority loans," he says.

And with all that can be seen so far in China, it's hard to resist believing him.

The author is in Dalian, China, as a fellow of the Asia Pacific Journalism Centre.


Fairfax Media Management Pty Limited

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Strong land demand a good sign: HIA
AAP OCTOBER 23, 2014 12:45PM

Strong demand for residential land points to a healthy year ahead for housing construction.

A bounce in sales in the June quarter had lifted the total number of sales for the 2013/14 financial year to 10 per cent above the 2012/13 level, according to the Housing Industry Association-RP Data Residential Land Report on Thursday.

The HIA's chief economist, Harley Dale, said growth in the regional areas was faster in the June quarter than in the capitals.

"Consistent with signals from other housing indicators, the geographical recovery in residential land sales is broadening," he said.

"That is an encouraging sign for detached and semi-detached dwelling construction in 2014/15."

In the June quarter, the median price of a block of residential land across the country rose 1.1 per cent to $205,330.

In the capitals, land prices were up 7.4 per cent from a year earlier, while outside the capitals the rise was 4.1 per cent.

RP Data's research director Tim Lawless said the June quarter bounce was "welcome news".

"A rise in land sales implies a rise in detached housing construction about six months down the track which in turn provides a substantial multiplier for the Australian economy: more jobs, more building materials, home furnishings, appliances and white good sales."

But, he said, it's yet to be seen whether the quarterly improvement can develop into a trend.

"Despite the June quarter lift, the previous three quarters were showing a slowdown in the number of sales while vacant land prices continued to rise, a trend which may point to ongoing supply shortages of well-located vacant land," Mr Lawless said.

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‘Alert’: house prices 10pc overvalued
THE AUSTRALIAN OCTOBER 25, 2014 12:00AM

David Uren

Economics Editor
Canberra
House prices.
House prices. Source: TheAustralian
THE growth in house prices over the past 18 months has left them overvalued by an average of 10 per cent relative to national income and vulnerable to a correction.

An analysis by Deloitte Access Economics shows the overvaluation is less extreme than it was in 2002 and 2003 when it reached 25 per cent, but partner Chris Richardson said the Reserve Bank was right to be monitoring house ­prices closely.

“Our measure showing prices are 10 per cent overvalued is in ‘alert but not alarmed’ territory. However, it is certainly not a bubble,” he said.

Mr Richardson said there was a long-established relationship between incomes and house prices. Incomes rise faster than the prices of most goods and services ­because of technology and rising productivity.

But productivity has no influence on land prices, the biggest variable in housing costs, which tend to rise at the same speed as income as a result.

House prices have risen just over 10 per cent in the past 12 months, with Reserve Bank deputy governor Philip Lowe warning this week that the housing market was “unbalanced” and increasing overall risk in the ­financial system. Mr Richardson said there had been several housing price booms that were more like a “bubble” than the current one.

“Housing was undervalued until 1987 when the sharemarket crash led the Reserve Bank to cut rates a lot and money poured from shares to housing,’’ he said.

“Within a short period of time in the late 80s, housing had a ­double-digit premium over its value. However, that didn’t last.”

Housing was undervalued for most of the 1990s, dropping to 11 per cent below fair value by 1997.

But this was reversed in the early 2000s, when Sydney house prices soared 40 per cent in two years after the RBA cut interest rates during the 2001 downturn.

“It was a time when the average Australian couple could go to work all day and return home tired to find the house had earned more than they had,” Mr Richardson said.

The Australian housing market risked crashing in 2004, but was rescued by the China minerals boom, which boosted incomes and re-established equilibrium.

Although the level of overvaluation is much lower now than it was then, national income growth is also more subdued and is unlikely to show any rapid growth over the next year or two as commodity prices remain weak.

This means any adjustment is much more likely to occur by house prices dropping back or at least remaining flat for several years until the premium is eroded.

The biggest risk to the housing market is a rise in unemployment, which could lead to forced property sales. “It is not interest rates that hurt housing ­prices, it is unemployment,” Mr Richardson said.

Although the level of overvaluation is smaller than it was in 2003, the RBA would be concerned households are more indebted than they were then, with borrowings averaging 150 per cent of household income, compared with 130 per cent a decade ago.

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Optimism test for Sydney and Melbourne’s housing boom
THE AUSTRALIAN OCTOBER 25, 2014 12:00AM

Greg Brown

Property Reporter
Sydney
A RECORD number of homes will put up for auction nationally this weekend as sellers race to cash in on the housing boom in Melbourne and Sydney.

Melbourne will host a record 1518 auctions, while more than 740 homes will be put under the hammer in Sydney, said Australian Property Monitors senior economist Andrew Wilson.

The selling frenzy comes as the Australian Prudential Regulation Authority this week warned that banks might be forced to hold more capital against risky mortgage loans in a bid to slow down rampant investor activity.

Dr Wilson said that the housing market was slowing, with price growth in most capital city markets flattening or falling in the September quarter.

Sydney was the exception, with strong growth for the quarter of 3.8 per cent.

“There is still plenty of confidence from sellers but maybe it’s a bit of a sense of vendors wanting to get in now before the boom ends,” Dr Wilson said.

“(This weekend) will be a big test for the market to see if supply doesn’t overreach demand.”

Bank of America Merrill Lynch chief economist Saul Eslake said that the high auction numbers might be a sign that the housing market had peaked.

He said APRA’s warnings of tightened lending standards would likely effect buyer confidence.

“I don’t think the market will fall anytime soon but it wouldn’t surprise me if people start to show more caution,” Mr Eslake said.

HSBC chief economist Paul Bloxham expects the housing boom in Sydney and Melbourne to continue until the Reserve Bank increases interest rates, which will likely be mid-next year.

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Apartment sites in sky-high demand

Samantha Hutchinson and Mercedes Ruehl
616 words
23 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Soaring demand for apartment sites in Sydney and Melbourne has some valuers saying there is more money to be made from flipping sites than keeping them.

"I've actually been recommending [selling] to clients because there's more money to be made flipping them than keeping them," Knight Frank ­valuer Chris Sutton told The Australian Financial Review.

Private property groups including Anka, Denwol Group and Legacy Property are some names that in past months have joined a growing wave of local developers to sell major sites to other – often offshore – developers for strong prices.

According to valuers, the returns ­associated with strong growth in ­apartment sales prices are being eroded by construction costs, which are also on an upward trajectory.

At the same time, new data from JLL shows some younger entrants into the Australian market are targeting lower profit rates on apartment projects than traditional players, and its pushing site prices to compelling levels.

Some newer developers are prepared to pay more for sites, because they are ­prepared to accept a lower profit rate, according to analysis by JLL director Tyrone Hedge. The analysis suggested development returns on some newly ­purchased sites are edging closer to 12-15 per cent profit on cost from approved sites, which compares to a ­traditional benchmark of 20 per cent.

"The NSW residential market has shifted," Mr Hodge said. "The fact that large developers are targeting below the traditional profit rate of circa 20 per cent indicates that they are factoring in ­continued growth for finished apartment stock, and taking a medium-term view of five years or more.

The finding comes a week after Stockland chief executive Mark Steinert and Frasers chief executive Guy Pahor urged fellow developers to avoid bidding wars that would drive up development site prices. "What we shouldn't do is punch the living crap out of each other and pay the absolute top dollar, and then be ­unable to create great communities," Mr Steinert told the Urban Development Institute of Australia.

Frasers Property surprised the market in December 2013 when it flipped a five ha river front site with DA approval for 774 apartments to Chinese-based developer Starryland for $58 million.

A new swag of properties to change hands in Sydney and Melbourne in past months showed the trend is gaining pace.

Private, family owned developer Anka sold a Lindfield mixed-use development to Aqualand in February for $27 million.

Property investor Phillip Wolanski's Denwol Group netted around $85 million flipping an apartment site in Epping to institutional investor Cbus Property.

Last week, Legacy Property and other investors scooped more than $40 million by offloading a site on the Pacific Highway in St Leonards. The group also earned a reported $56 million selling a tower at 221 Miller Street in North Sydney, which could yield up to 174 apartments.

In Melbourne, Pacific Shopping Centres owner Sam Alter this year scrapped plans to build a 44-level residential ­building at Hanover House in Southbank, in favour of selling the commercial ­building to a Chinese developer. He netted $22.5 million in the process.

Other prominent private property investors include Michael and Andrew Buxton, Daniel Grollo and Lorenz Grollo have followed suit, selling to groups including Hiap Hoe and Xiang Xing.

"Developers that own these sites are seriously considering their options, should they develop the project themselves or should they sell to buyers ­motivated by different drivers, and secure funds early without the risk," CBRE ­director Mark Wizel said.

"The explosion of Chinese, Singaporean and Malaysian development capital has propelled land prices to levels not seen in Melbourne in 30 years."


Fairfax Media Management Pty Limited

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Negative Gearing - Why so negative?

John Beveridge
1073 words
24 Oct 2014
Herald-Sun
HERSUN
English
© 2014 News Limited. All rights reserved.

IN THE BLACK IF THERE is one topic guaranteed to cause a strong reaction, it is negative gearing.

Many people with only a hazy idea of what it actually is will blame this single measure for everything from locking young people out of the housing market and causing dizzying property price rises to driving the national Budget into deficit as fat cats rort the tax system.

Indeed, the reaction to negative gearing has been so, well, negative, that there have been some serious calls for it to be scrapped entirely.

Saul Eslake, chief economist at Bank of America Merrill Lynch, has been prominent in urging for it to be ditched and he has been joined by others including the Grattan Institute’s John Daley and Australian Council of Social Services chief executive Cassandra Goldie.

Those supporting negative gearing have been thin on the ground and have some obvious vested interests, such as the Housing Industry Association and Mirvac Group chief executive Susan Lloyd-­Hurwitz.

So what exactly is negative gearing, why does it cause such polarised reactions and why is there absolutely no chance that those asking for it to be abolished will get their way in the foreseeable future?

Put simply, negative gearing is the process of allowing investors who make a loss on rental housing (or any other asset) after paying interest on their borrowings to deduct that loss from their other income.

As such, negative gearing actually breaks one of the key investment rules of always making sure you get a positive and healthy return on your capital.

The theory with negative gearing is that while the investor might make a cash loss every year, that loss will be cut by annual tax deductions, followed by a big payday of concessionally taxed capital gains when the property is eventually sold.

I say theory because the negative gearing landscape is absolutely littered with failures — people who tried to build up a rental property portfolio but crashed and burned for any number of reasons — bad or no tenants, bad property choices, too much debt, rising interest rates, running out of money, losing a job or falling property prices.

There are successes as well given that debt (or gearing) exaggerates investment returns in both directions but the idea that negative gearing into low-yielding rental property on its own will make anybody rich is a dangerous myth that suckers too many people into risky, cash-flow-sapping plans that may not suit them.

It is a bit like millionaires who restructure their affairs so that they can get the pension — it may work but it is ultimately a dumb, costly and self-defeating strategy.

So why do I say negative gearing won’t be changed?

The reasons are both practical and political and also based around fairness, given that all negative gearing does is bring ordinary wage and salary earners into line with any business that can deduct its interest expense from its income before assessing tax.

On the practical side, the first point to be made is that in the Federal Budget context, negative gearing is really small beer.

While opponents like to paint it as a massive concession sapping the nation’s finances, the reality is a long way short of that.

Negative gearing opponent John Daley of the Grattan Institute has helpfully run his own numbers which showed that, in the decade to 2010-11, 1.2 million taxpayers recorded net losses of $13 billion on investment properties.

He estimates that stopping all new negative gearing claims — given that changing existing arrangements would involve retrospective legislation — would net the Federal Government a grand long-run total of $2 billion a year.

In the terms of a Federal Budget that received $360.3 billion and paid out $406.4 billion in 2013-14, that is little more than a rounding error.

Indeed, tax receipts for that year fell $3.3 billion short of Budget and payments by $4.2 billion, so $2 billion (if that was the number that eventuated) would fail to move the Budget needle in any discernible way.

That may not matter if getting rid of negative gearing produced some wildly positive social benefits, but at the least the numbers decry the often-heard claim that its abolition would instantly deliver balanced Budgets and economic nirvana.

A political reason why negative gearing rules won’t be changed is that for this barely discernible change in the Budget outcome, the potential pain is actually quite large and widespread.

Rather than being the exclusive preserve of silvertails, negative gearing has spread a long way through many different income levels.

About 15 per cent of all taxpayers now use negative gearing and many of them are from lower income levels.

While the bigger individual claims are obviously made by the truly wealthy with more money to lose, the majority of claimants are in the $37,000-to-$80,000-a-year salary bracket.

Next are those in the $80,000-to-$180,000-a-year bracket, followed by — surprisingly — those earning less than $20,000 a year.

While none of these current negative gearers would necessarily lose anything, creating two classes of voters — those who can claim negative gearing and those younger voters that no longer have that option — involves spending a lot of political capital for a barely measurable return.

Adding on to the political cost is the possibility that abolishing negative gearing might actually work slightly and/or coincide with housing prices falling from their peaks.

That alone has the potential to change the equation from about 15 per cent of the population being really angry with Prime Minister Tony Abbott to the vast majority, who could safely and with great venom blame the Government for trashing the value of their biggest investment.

With the added possibility that renters could be angry too as rents spiked and rental housing supply fell.

As Sir Humphrey Appleby would say, that would be a courageous political decision indeed — one that is not going to happen in Australia with its stellar home ownership rate of 67 per cent.

If those opponents of negative gearing really want to reduce the popularity of the strategy, perhaps they should commission some long-range results from actual users.I suspect the average overall returns would fall a very long way short of the financial and emotional risks that have been taken.


News Ltd.

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CHRISTOPHER JOYE
Housing brakes are on the way
PUBLISHED: 10 HOURS 19 MINUTES AGO | UPDATE: 4 HOURS 22 MINUTES AGO
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The banks are all naturally keen to continue fostering housing credit growth that exceeds national incomes in order to rationally maximise their own profits.  Photo: Glenn Hunt

CHRISTOPHER JOYE
Those who are willing authorities to avoid interfering with Australia’s increasingly carbonated $5.2 trillion housing market, despite record low borrowing rates, are likely to be disappointed. Rest assured that so-called “macroprudential” brakes on home loan lending will arrive before the end of this year.

But this is not actually bad news for the banks and it is unlikely to halt the freight train, fuelled by cheap money, that is inflating the value of Australia’s 9 million residential homes at a pace of more than three times our income growth. Only rate rises will do that – and the financial markets think we will not see the Reserve Bank of Australia step up to the plate until the second half of 2015.

After the racket in September over the RBA’s sudden about-face on the need for regulators to intervene in Australia’s housing boom, a new narrative has gripped both the industry and the media.

Privately and publicly, bankers, investors, analysts and some pundits have started suggesting that the Australian Prudential Regulation Authority’s purported macroprudential action will be much ado about nothing. One claim is that officials will restrict their activities to the current round of high-profile “jawboning” coupled with one-on-one engagements with bank management teams. But this is basically run-of-the-mill supervision.

In the last week, a top executive at a mid-sized bank noted that they have not seen any evidence of APRA measures that would be remotely analogous to macroprudential constraints on credit creation.

“There have been no signs of system-wide capital surcharges being applied to investment and/or interest-only loans, or any attempts by APRA to impose an increase in the minimum interest rate buffers that banks assume when assessing new loan applications,” the executive said.

He did, however, highlight that some banks’ home loan market shares look to have suddenly declined, which indicates APRA has been targeting specific lenders that it thinks have been originating too many high-risk loans.

RHETORIC STILL JUST THAT
The banks are all naturally keen to continue fostering housing credit growth that exceeds national incomes in order to rationally maximise their own profits. And while the RBA did not pull any punches by declaring it would work with APRA to use macroprudential tools to “lean against” surging speculative investment in Sydney and Melbourne, this rhetoric has yet to be translated into tangible policy steps.

Australia’s exuberant residential property market has given us no reason to believe that credit or house price growth is about to decelerate to a more sustainable rate that mirrors the income earning experience of consumers. Last weekend, the auction clearance rate in Sydney was a boom-time 78 per cent, while the national rate also popped above 70 per cent. Australian home values have jumped 1.4 per cent over the past 30 days according to RP Data. And the 12-month capital growth rate continues to triple wages at a stubbornly strong 9.5 per cent.


The good news for those concerned about burgeoning bank balance-sheet risks is that our most conservative regulator on the financial stability front, APRA, is bound to act before the year is out. The first phase of this campaign was the public jawboning and targeted communications to institutions that have perhaps been a little too enthusiastic in their efforts to push leveraged housing investments.

Round two will likely see the introduction of capital charges on higher-risk loan categories, including interest-only investment products, which will make this finance more expensive for banks to offer, coupled with more exacting interest serviceability tests. Banks could respond by passing on these higher costs to borrowers via rate increases and/or simply rationing the affected credit.

Indeed, it is possible that banks will seek to redirect housing demand into more profitable – say, owner-occupied – loans that have not been targeted by APRA through new financial incentives.

This reveals the second-order problems that emerge when regulators interfere with parts of otherwise freely functioning markets. As RBA governor Glenn Stevens warned a couple of years ago, lenders will always find ways to offer credit if borrowers want to tap ultra-cheap money.

I suspect we will eventually see a deceleration in house price growth to a little more than twice the rate of incomes – perhaps 6 per cent to 7 per cent annually. And I don’t expect house prices to properly correct until the RBA figures out that it needs to normalise the lowest loan rates in history.

Given central bankers feel obliged to guarantee the community trend growth, irrespective of the distortions their own policy setting induce, the interest rate can could be kicked down the road for some time yet.

The Australian Financial Review

BY CHRISTOPHER JOYE
Christopher Joye
Christopher Joye is a leading economist, fund manager and policy adviser. He previously worked for Goldman Sachs and the RBA, and was a director of the Menzies Research Centre. He is currently a director of YBR Funds Management Pty Ltd.

@cjoye

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