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House prices again high on RBA’s agenda
The Australian 12:00am November 2, 2016
Michael Bennet
Bank lending to property investors surpassed owner-occupier growth for the first time in more than a year, frustrating regulators’ efforts to ease risks in the housing market as the Reserve Bank tries to avoid lowering official interest rates any further.
Holding the cash rate steady at a record low 1.5 per cent for a third straight month, the RBA yesterday reiterated concerns about the “considerable supply” of apartments set to come on to the market in the next few years in Sydney, Melbourne and Brisbane.
While noting lower housing turnover amid fewer sales and weaker credit growth, the RBA upgraded its view on the recent pick-up in house prices from having “strengthened recently” to “rising briskly” in some markets.
The move came after CoreLogic’s monthly data revealed capital city prices powered to record highs last month.
Bulging household debt — which has spiked to about 139 per cent of GDP in the past four years — and resurgent house price growth sparked Standard & Poor’s to downgrade the outlook on 25 small and mid-tier lenders this week.
Having previously sliced the big four banks, S&P now has a negative outlook on almost all lenders it rates in Australia.
As governor Philip Lowe suggested, the RBA was reluctant to move the cash rate down after cuts in May and August, and economists and traders deemed that the RBA’s five-year easing cycle may be over and rates had “bottomed”.
“With inflation remaining within the RBA’s range and the economy performing better than expected, we anticipate that the RBA will leave rates on hold for some time,” said Aberdeen Asset Management senior investment manager David Choi.
Westpac chief economist Bill Evans said rates would probably be on hold through next year.
The dollar jumped immediately after the RBA’s decision, trading late yesterday around US76.60c and the stockmarket’s S&P/ASX 200 index eased 0.5 per cent to 5290.5.
Despite many economists believing rates will still move down next year, the market isn’t ruling out that the RBA’s next move will be up — raising the risks for highly indebted borrowers.
According to fresh “stress testing” from Moody’s yesterday, Sydney is the most exposed to changes in house prices and interest rates.
A 25 basis point change in interest rates would lead to a 0.9 percentage point adjustment in income to meet repayments.
The analysis argues the rise in house price growth, particularly in Melbourne and Sydney, is “eroding” affordability gains delivered by the RBA’s rate cuts.
With more affordable home loans reducing defaults, Moody’s is concerned that price gains would be “negative” for billions of dollars of residential mortgage-backed securities sold by banks to institutional investors.
Ahead of the RBA’s broader statement on monetary policy update on Friday, Dr Lowe shrugged off mixed September quarter inflation data and expressed confidence that the underlying rate of 1.5 per cent would gradually pick up in the next two years towards the 2 to 3 per cent target as the economy slowly strengthened.
Dr Lowe’s concerns centred on housing after rate cuts since late 2011 spurred price gains of more than 65 per cent in Sydney and a record building boom that has led to concerns of an apartment glut.
Economists also fear there could be a broader growth “hole” in the economy once home building levels recede, given the uptick in construction has helped the economy transition from the end of the mining investment boom in recent years.
Dr Lowe reiterated that regulators’ “supervisory measures” had strengthened bank lending standards and some were being more cautious in certain segments.
But after cooling growth levels to meet new regulatory limits, banks are wading back into the investor lending market despite lending to landlords being viewed as more risky than to people living in their own homes.
According to new data this week from the RBA, investor credit growth rose 0.6 per cent in September — or around 7 per cent annualised — faster than the 0.5 per cent monthly growth in owner-occupier loans for the first time since August last year.
Deutsche Bank analyst Andrew Triggs said it marked six consecutive months of rising investor lending growth amid overall soft housing credit growth.
After being forced by the Australian Prudential Regulation Authority to slow their annual lending growth to landlords to below 10 per cent, banks are again trying to write more loans to investors to boost profits in a slower lending environment
In overall mortgage lending, Credit Suisse analysts said APRA’s monthly data showed Commonwealth Bank had grown the strongest in the six months to September 30, followed by Westpac, NAB and ANZ.
Annual housing credit growth has been falling since the November peak of 7.5 per cent, raising fears banks will go up the risk curve to maintain volumes.
S&P noted similar concerns, claiming “riskier competitive behaviour” may be growing.
“Housing developments, both construction and prices, are more important factors in the policy debate than the RBA is prepared to admit,” said RBC Capital Markets economist Su-Lin Ong.