A prominent economist has said he doubts that macro-prudential tools will have any effect in containing the housing market in a low rate environment.
Speaking at the Australian Mortgage Innovation Summit last week, HSBC’s chief economist, Paul Bloxham, said Australia will likely need more than macro-prudential policies to have any sustained effect on the housing market.
This comes after the Reserve Bank governor Glenn Stevens noted that the central bank has been in discussions with APRA over managing potential risks in the housing sector, following the decision to cut the cash rate by 25bps earlier this month.
Bloxham said the Reserve Bank should take a lesson from New Zealand, who implemented macro-prudential policies, in the form of LVR caps, in late 2013.
“Those tools were effective for a very short period of time, but then the RBNZ followed up with lifting interest rates,” he said.
“We had the RBNZ lift interest rates by 100bps last year between March and July. It was really probably that lift in interest rates that was the main thing that kept the housing market contained in the end.”
Although APRA and the RBA
are not expected to follow the same macro-prudential route as New Zealand – instead more likely to enforce additional capital requirements on lending to investors – Bloxham says he still has doubts.
“Now, will that be successful? I have some doubts. I think they [APRA] may have to do a little bit more if they really want to have some effect. Far and away, history tells you that within Australia, the biggest effect on the housing market is interest rates.”
However, Bloxham said the only housing market that the RBA and APRA need to be cautious of is Sydney.
“…In Sydney, this is going to be quite a challenge. The rest of the market doesn’t look over inflated. I don’t think there is a housing bubble in Australia. I think that if Sydney sees the same trends as we have seen over the last year or two, that is house prices is running at an annual inflation rate of 13% year on year, then if that continues for very much longer than you will need to see prices at some point will come down.”