Australia needs to put limits on home lending in order to keep house price growth under control, the head of the Financial Services Inquiry has said.
After addressing the Australian Centre for Financial Studies lunch in Melbourne this week, David Murray, who is also a former Commonwealth Bank chief executive, said Australia’s historically low interest rate environment is pushing up house prices and putting pressure on the financial system.
Capital city house prices indeed edged up again in February, according to CoreLogic RP Data’s latest Home Value Index Results, with prices rising 0.3% over the month. House prices are now up 8.3% compared to 12 months ago. The closely-watched Sydney and Melbourne markets are up 13.7% and 7.4% respectively.
According to the findings of the latest Adelaide Bank/REIA Housing Affordability Report, unsustainable house price growth has blown out the price-to-income ratio for Australian households. The proportion of family income required to meet loan repayments increased by 1.1 percentage points to 31.5% in the December quarter.
Murray has now suggested that APRA enforce “prudential offsets” to limit these risks in the housing market. When asked what sort of macro-prudential tools should be adopted, Murray pointed to Singapore and Hong Kong, who have introduced LVR limits on second properties.
After the Reserve Bank cut rates to 2.25% in February after an 18 month period of stability, Savanth Sebastian of CommSec told Australian Broker
that he thought macro-prudential tools would likely be introduced this year. However, unlike Murray, he doesn’t believe they will come in the form of LVR limits.
“They [the RBA
and APRA] will come out with a policy around macro prudential tools. However, rather than hard and fast values for homeowners in terms of minimum deposits, it may be that they start pushing the banks to be holding a higher percentage in reserves for higher risk investors in property. Then we will start to see a real difference in home loan owner occupier rates and investor interest rates, which is something that we used to see back in the 80s and 90s.”
But Sebastian said that the regulators need to be careful when assessing which macro-prudential route to take.
“They can’t come out with serious detractionary policies on housing because the last thing they want to do is see a significant pull-back in activity or price growth. It is the one area of the economy that is maintaining momentum and driving wealth.”
The Reserve Bank has hinted at further rate cuts, but has also said they are working with other regulators “to assess and contain risks that may arise from the housing market.”