Surging Australian house prices may only face ‘modest’ impact from tighter home loan rules
New mortgage lending rules will do little to curb Australia’s runaway property market, regulators have admitted.
Stricter standards on households’ ability to pay back loans will have only a “fairly modest” impact on prices, the Australian Prudential Regulation Authority executive director of policy, Renée Roberts, said on Monday.
Housing prices have surged through 2021, with increases of 22% expected by the year’s end. But they are then tipped to flatten, with markets expecting interest rate rises sooner than the guidance of 2024 provided by the Reserve Bank of Australia.
According to market analysts CoreLogic, Australia’s housing auction market experienced its second busiest week of the year, with 3,562 homes going under the hammer, up 8.2% from the previous week.
Clearance rates are down due to increased supply, with 75.5% of sales successful, down from a peek of 84.4% in early October.
In October Apra told mortgage lenders to ensure that borrowers could continue to repay their current interest rate with a buffer of 3% for further increases, up from the previous test of 2.5%.
On Monday Roberts told the lower house standing committee on tax and revenue that Apra doesn’t “target house prices or matters of affordability” but is concerned with financial stability and ensuring households are able to make mortgage repayments.
Roberts said the aggregate impact of the new lending rules on prices will be “fairly modest” as many people don’t borrow at their full capacity.
Gideon Holland, Apra’s general manager of policy, said Australia’s financial system could withstand a decrease in house prices provided borrowers stayed in work and were able to service their loans.
Apra was not concerned about house prices “in and of themselves” but when a drop in prices coincided “with poorer economic conditions” including higher unemployment, he said.
The Reserve Bank assistant governor, Luci Ellis, told the inquiry she accepts that low interest rates have contributed to house prices and “at some level that is our doing”.
But, Ellis said low interest rates and low inflation were preferable to higher inflation, which would cause Australia to have difficulty attracting investment.
Asked about the impact of housing prices on inequality, Ellis conceded it is a “legitimate concern” and there is an “intergenerational issue” because people whose parents rent have much greater difficulty owning their own home.
But people whose parents own their own home benefit because “the house doesn’t disappear – there’s a mechanism by which children can relatively easily end up being homeowners”, she said, in an apparent reference to parental guarantees helping children get loans or inheritance of real estate.
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Liberal chair of the committee, Jason Falinski, prosecuted the argument that increasing land supply and decreasing the constraints of planning laws would boost construction and lower prices.
Ellis countered that the supply of well-located land, near jobs and amenities, is constrained in coastal cities, particularly in Sydney.
The RBA has kept interest rates at a record 0.1% and has said it won’t lift them until inflation is “sustainably” within its 2% to 3% target range.
But borrowers are rushing to lock in low interest rates amid gathering expectations Australia’s central bank will declare an end to its record low cash rate earlier than its current prediction of 2024.
Economists say the RBA has little choice but to revise its rate rise timing given mounting evidence the economy is recovering quickly from the lengthy Covid-triggered lockdowns in NSW, Victoria and the ACT.
In Monday’s hearing, Ellis declined to comment on future interest rate moves, but acknowledged that the market is reflecting its belief the RBA will lift rates sooner than 2024.