What changes are APRA making, and will they avert a property bubble burst?

Spiralling household debt and property prices can be helped by lending changes, but issues go far deeper

What changes are APRA making, and will they avert a property bubble burst?


By Mike Wood

While the Reserve Bank of Australia (RBA) cash rate announcement is unlikely to slow the ongoing housing boom, measures are now on the table to avoid the Australian property bubble bursting any time soon.

Federal Treasurer Josh Frydenberg has sent crucial signals to the Australian Prudential Regulation Authority (APRA) to curb risky mortgage lending after several major international bodies, including the International Monetary Fund (IMF), flagged the Australia’s property bubble was running out of control.

The canaries in the coal mine have been there for some time: CBA changed the rate against which it judges loan applications as far back as June, while rates had begun to rise naturally as banks hedged against as cash rate rise in 2024.

The RBA has insisted for months that it will not shift that date forward, and while there had been utterances from banks that they thought it would happen sooner, the recent lockdowns and accompanying economic slowdown appears to have realigned predictions.

Avoiding a property bubble burst in Australia

Avoiding a property bubble burst is a combination of factors, as is the rapid growth of house prices in the first place, with low interest rates, pent up demand and a lack of supply all contributing.

In that context, the macroprudential measures that APRA might institute could be seen as a short-term fix – especially given that the underlying market conditions, namely a chronic lack of housing supply, still exist.

Urban Taskforce CEO Tom Forrest told Australian Broker last month about the housing supply crisis in Sydney, and cited that as the biggest reasoning for the Australian property boom.

“Urban Taskforce has been flagging for a long time that the drop off in planning approvals was going to have an inevitable impact on supply down the track,” he said.

“You can’t build new houses unless you have approvals, and we’d had a significant drop off since the middle of 2018, which dropped further by the end of 2019, before Covid, and then further for obvious reasons since Covid.”

“There was some recovery in the early part of 2021, which was welcome, but unfortunately, we went into a second lockdown and approvals dried up.”

“It’s not that people weren’t trying to get approvals: money was cheap and the market was high. Prices have never been so good from a developer’s perspective, but the planning system went into hibernation during lockdown.”

“What that spells is a lack of supply going forward for at least two to three years, because you can’t suddenly produce houses. Even if approvals spiked tomorrow – though I see no sign of that – you wouldn’t get a significant supply of housing for three or four years.”

Macroprudential controls can help keep the Australian property market afloat

“Particularly when it comes to apartments: in Greater Sydney, apartments have been 65% of the additional housing supply for the last 25 years. If you’re not approving significant numbers in apartments, you’re not going to get significant growth in housing supply.”

“The reasoning behind that is that the cost of infrastructure for greenfield locations is too much for government to bear, so they rely on infill development and apartments.”

The link between high rates of household debt and rising prices could be the trigger that causes the Australian property bubble to burst, so taking measures to slow the market before that makes perfect sense.

“We’ve been concerned for some time about the lack of supply leading to pressure on prices,” said Forrest. “That’s now come to bear.”

“Even the IMF has said that the government has to take steps to make housing more affordable and ensure that we don’t have a housing price bubble which is unserviceable when you compare incomes with the prices that people are paying for mortgages.”

“The IMF has called for two things. They called on APRA to apply tighter restrictions on lending, to ensure serviceability going forwards, and Josh Frydenberg acted on that within a few days.”

“Secondly, they’ve called for increased flexibility in the planning system to secure greater supply to meet demand. That’s something that the financial press don’t concentrate on, but of course, housing prices are a factor of the availability or finance and the demand and supply. All of those play into the rising house prices.”

The Australian property bubble should deflate rather than burst

“At the moment, we have rising prices because of the availability of cheap cash, plus loose purse strings from APRA because of the desire to stimulate the economy in the Covid environment, which is fair enough.”

“Ironically, we’ve had a drop off in immigration, which would normally mean a drop in demand, but we’ve seen prices continue to go up because there had been pent up demand over the last ten to fifteen years of undersupply.”

“The things that had led to these prices spikes are those financial matters, but also built up demand that has arisen from undersupply and that has, in no small part, come from an overly-proscriptive, overly-constrained planning system – all around Australia but particularly in New South Wales.”

All that said, avoiding a burst the Australian property bubble is the least that the government can do to stem the rising house prices, but it still does not augur well for long-term housing strategy.

“APRA having to apply prudential controls is a white flag,” said Forrest. “It’s saying that the only way that we can fix this problem of risky serviceability is by tightening the availability of cash.”

“That doesn’t help people who are currently locked out of the housing market: all the Millennials, all the under-40s, who are trying to save for a deposit and get into the housing market. All it does is exclude them from the housing market.”

“What we’ve done is recognised that they can’t solve the supply issue in the short term, so they’ve done the only thing that they can do.”

“We don’t blame Josh Frydenberg and APRA for doing what they felt they needed to do to ensure that, were there at some stage a hike in interest rates, you suddenly don’t have all these people having to give up their home and sell it under distress. That’s a sensible thing to do in the circumstances.”

“What we need is a focus on the other side of the coin. Encouragingly, it was Josh Frydenberg who commissioned Jason Falinski to chair the Federal Parliamentary inquiry into housing affordability.”

“That forum has generated a whole range of interesting submissions, from the RBA, the ABS, the Grattan Institute and even the Productivity Commission of New South Wales.”

“Even they have criticised the constraints of the New South Wales planning system: an arm of the NSW Treasury has explicitly criticised the NSW planning system and the constraints that it places on housing supply.”

Related Stories

Keep up with the latest news and events

Join our mailing list, it’s free!