House prices could force RBA’s hand

THE Reserve Bank could be provoked into delivering an earlier than expected rate hike if existing regulatory clamps on Australia’s “remarkably resilient” housing market fail to rein in price growth.

And elevated building approval levels suggest regulators may have to consider further short-term curbs as questions swirl around whether new home starts have peaked, according to UBS economists.

One of them, George Tharenou, says the most likely scenario is lending conditions will tighten and growth in house prices slow as the effects of regulatory moves filter through the banking system.

But if they didn’t succeed, a blunter tool could be necessary, he said, in a note for investors.

“A persistent upside surprise on housing ahead would raise the risk of an ‘early’ RBA cash rate hike before our expected second half of 2018 start to (policy) normalisation,” Mr Tharenou said.

While it will be wary of lifting rates before seeing consistent evidence of improvement in wages, inflation and the jobs market, the RBA has called out the red-hot property as a major risk to financial stability.

Members of the central bank’s board had their monthly meeting yesterday to consider the 1.5% cash rate and kept it on hold – as expected.

In March the banking regulator, the Australian Prudential Regulation Authority, ordered lenders to restrict interest-only lending to 30% of all new loans – a cap they are only now starting to settle below, according to UBS.

They responded by ratcheting up prices on those products, while in some cases reducing rates on principal and interest loans.

But that merely returned the interest-only share of mortgages to levels seen as recently as the March quarter last year, Mr Tharenou said.

Official figures show the category favoured by property investors has regularly breached 30% all the way back to early 2013.

Mr Tharenou said there would be pressure on lenders to pull down even further their interest-only lending relative to their broader mortgage lending.

They would also face heat to reduce their high loan-to-valuation mortgages – those in which a loan covers more than 80% of the property’s value – given these have also drawn APRA’s ire.

Building approvals nationally were at 216,000 in the year to July, suggesting the property sector was “remarkably resilient” and could yet defy UBS’s forecasts for a deep slide in housing starts later this year, Mr Tharenou added.

Property prices stalled in August, according to figures from industry researcher CoreLogic late last week, with Australia’s combined capital cities recording growth of just 0.1% for the month.

Melbourne remains the market most resilient to a slowdown among the capitals, with prices up 0.5% in August and 12.7% for the year to August.

Sydney prices were flat in August and up 13% on a year ago.