Regulators need to cool red-hot market, experts say

Despite the RBA's position that "we don't have a problem here," market watchers say regulators will need to step in to curb the boom

Regulators need to cool red-hot market, experts say

Market watchers are continuing to bet that financial regulators will step in to cool the red-hot housing market, despite Reserve Bank Governor Philip Lowe’s insistence that “at the moment we don’t have a problem here.”

Lowe’s comments came Tuesday after the RBA reduced its bond-buying program but kept the cash rate at its current record low of 0.1%, according to a report by The Australian.

On Thursday, Evans & Partners analyst Matthew Wilson took the RBA and the Australian Prudential Regulation Authority to task for failing to step in when house prices shot up 16% in the June financial year – the highest annual growth since 2004, according to The Australian.

“Both the RBA and APRA continue to avoid accountability on the surge in house prices, a puzzling posture when house prices collateralise at least 63 per cent of system credit,” Wilson wrote in a client note. “We risk turning from virtuous to vicious.”

Total housing credit now equals $1.93 trillion, growing at a rate of at least 5%, according to The Australian. The mortgage portfolios of Australia’s banks add up to 63% of outstanding credit, with the household debt-to-GDP ratio leading the world at 124%.

Sixty-two percent of new mortgages have a debt-to-income ratio of more than four times, and 19% have a DTI of more than six times.

Wilson acknowledged that financial regulators had no authority to control house prices.

“But it’s puzzling, because the value of a house is very important in terms of the collateral of the financial system,” he wrote. “The risk is that we are creating a vulnerable banking system, which last year had to defer about 10 per cent of its loans as a result of the pandemic. The banks have plenty of capital and provisions, but we’re creating some long-term fragility.”

Read next: Loan stress likely to force regulators’ hands – report

Lowe referred on Tuesday to the Council of Financial Regulators’ most recent discussion of the issue at its quarterly meeting last month. The CFR said owner-occupiers accounted for most of the increase in household borrowing, unlike previous booms where investors accounted for most of the spike.

However, while investor demand had been subdued, it’s now growing, according to The Australian. The CFR said that despite this, lending standards remained sound.

While big bank heads have downplayed the need for macroprudential intervention, their economic teams have not been shy about saying the government could need to step in, The Australian reported.

On Thursday, ANZ senior economist Felicity Emmett repeated her March warning that regulators would need to put the brakes on the market before the end of the year.

“The latest data show that pressure to cool the housing market has intensified,” Emmett said. “Housing finance commitments rose 4.9% month on month in May and are up a massive 90% over the past year. Moreover, investor lending is accelerating, rising more than 30% over the past three months, suggesting that a speculative element is emerging in the market.”

Ryan SmithRyan Smith is currently an executive editor at Key Media, where he started as a journalist in 2013. He has since he worked his way up to managing editor and is now an executive editor. He edits content for several B2B publications across the U.S., Canada, Australia, and New Zealand. He also writes feature content for trade publications for the insurance and mortgage industries.
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