Home loan curbs should be a question of when, not if

Amid all the grim economic news, there is one part of the economy that has seemed almost bulletproof: housing.

It may be good news for homeowners that Sydney house prices are up a massive 20.9 per cent in the last year, while Melbourne prices are up 13.1 per cent, even if monthly growth is slowing. But for the economy it’s not so simple.

Some analysts think regulators will introduce lending curbs after lockdowns have lifted.Credit:Matt Davidson

Although property booms do strengthen some parts of the economy, the financial risks of growing indebtedness (not to mention the social cost of unaffordable housing) are only too well-known. And lately, there have been warning signs suggesting some of those financial risks are increasing.

This will raise some hard questions for regulators about whether it’s time to rein in the property party by introducing lending curbs, with some economists tipping such an intervention by the end of this year.

But does it strike you as strange that economists are even discussing lending restrictions at the same time as they also are debating if we’re in recession?

It shouldn’t, when you consider the extent of the housing bonanza, and the wave of cheap debt that is driving it.

When COVID-19 first slammed into the economy last year, there were fears it would crush housing market, which accounts for about two thirds of the Big Four banks’ loans. But the modelling showing prices could fall by up to a third was way off the mark, and we ended up with a property boom instead.

This is by no means unique to Australia, as the underlying cause is the global plunge in interest rates.

The extraordinary RBA moves to slash the cost of borrowing money – including a $200 billion line of cheap credit for banks, and a government bond-buying program – have cut interest rates on many fixed-rate loans to around 2 per cent. Homebuyers have responded just as they’ve done in past rate-cutting cycles: by bidding up house prices.

In economic jargon, such asset price booms are a “transmission mechanism” through which lower interest rates stimulate the real economy. Rising house prices tend to lift activity and create jobs in sectors such as retail, as homeowners kit out their new homes, and construction activity as developers commit to new projects.

Record low interest rates have pushed up house prices around the world, including in Australia. Credit:Getty Images

Even so, the risks of pumping up house prices to fuel economic growth are obvious. A debt-fuelled surge in asset prices can encourage more people to speculate on property with borrowed money, leaving some households (and banks) more vulnerable when there is an inevitable shock.

The Reserve Bank is well aware of this risk, but has determined the positives of higher employment outweigh the risks of an overheating housing market.

But as the boom rolls on, that balancing act will become a much closer call, especially once lockdowns are lifted over the coming months.

The regulators have always insisted their responsibility is not to set house prices, but rather to make sure the banks don’t let credit standards lapse. This week, however, there was further evidence that at least one measure of higher-risk lending is on the rise.

Whether the regulators intervene to curb risky lending this year, or they wait until 2022 as others expect, such a move would probably take some heat out of the property market. That wouldn’t be a bad thing.

Figures from the Australian Prudential Regulation Authority (APRA) show that in the last few quarters, new lending to highly-indebted borrowers has been on the rise

APRA said the share of new loans where the customer was borrowing more than six times their income jumped from 19.1 per cent to 21.9 per cent in the June quarter, the highest level since it started collecting this data in 2019. A year ago, the share of new lending in this category was only 16 per cent.

Another risk on the horizon is that the many borrowers who have piled into fixed rate home loans will almost certainly face higher interest rates when their fixed terms end. Banks have factored this into their credit assessments, but it still means many households must adjust to higher repayments down the track.

To be fair, other trends are less concerning. Unlike past housing booms, owner-occupiers are the driving force in the market today, notwithstanding recent signs of stronger lending to investors.

So far, the RBA has determined the positives of higher employment outweigh the risks of an overheating housing market.Credit:Louie Douvis

The APRA data also showed a lower share of lending in the June quarter was on an interest-only basis, or to borrowers with deposits of 10 per cent or less.

So, it’s a mixed picture. Even so, the regulators would hardly be comfortable with the fact that prices are still soaring in a lockdown, housing credit is growing much faster than the economy, and more of the new loans are going to highly-indebted borrowers.

For that reason, some analysts expect that once lockdowns end, it won’t be long until regulators introduce lending curbs known as “macroprudential” policies, as they did in late 2014 and 2017.

Jefferies banking analyst Brian Johnson says once lockdowns have been lifted, he expects some sort of credit rationing for loans with high loan-to-valuation ratios, and restrictions on loans with high debt-to-income ratios.

“Macroprudential brakes are about stopping a problem before it happens,” Johnson says. “We should expect it gets harder and harder for people to participate in the market.”

ANZ Bank economist Felicity Emmett also points out the latest lockdowns will probably keep interest rates staying lower for longer, because any lift in inflation and wages growth has been delayed.

“In a way, that suggests there’s more of a reason to bring in macroprudential to slow credit,” Emmett says. “We still think there’s a very good chance that there’s something put in place by the end of the year, but there’s some risk that the timing is delayed.”

Whether the regulators intervene to curb risky lending this year, or they wait until 2022 as others expect, such a move would probably take some heat out of the property market. That wouldn’t be a bad thing.

Ross Gittins is on leave.

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