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April 10, 2017

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Australia advised to play it cool in a hot market

IN their struggle to cool red-hot property prices, Australia’s authorities are ratcheting up measures that could dent the whole market but are avoiding more targeted steps that have had some success in New Zealand and China.

Australian regulators first focused on reining in investment loans in 2015, by imposing an annual limit of 10 percent on how much banks could expand their investor loan books. That worked for a while, but the heat is on again in both Sydney and Melbourne.

According to property consultant Core Logic prices in Sydney are rising almost 20 percent a year. In Melbourne, the pace is over 15 percent.

That and all-time high household debt prompted the Australian Prudential Regulatory Authority last month to limit new interest-only loans to 30 percent of total new mortgage lending, from 40 percent now, and warning there would be much “monitoring” and “scrutinizing.”

Industry players, however, doubt this will do the trick.

“I personally don’t think this will have a material impact,” said Simon Orbell, director at Sydney-based mortgage broker Smartmove,. Prices kept rising even though it was already a tough lending market. “Maybe more needs to be done,” he added.

Behind-the-scenes pressure has already led the major banks to raise rates on investment loans, particularly for interest-only products favored by speculators, according to those in the know.

Variable interest rates on investor loans from Commonwealth Bank of Australia — the country’s top mortgage lender — are as high as 5.94 percent, compared with 5.25 percent for owner occupiers and an official cash rate of 1.5 percent.

There has been market speculation that the central bank, the Reserve Bank of Australia, will be forced to raise interest rates, a yet blunter instrument, though record low inflation and weak wages growth make that an unattractive option.

There is also political resistance to measures that could bring prices down, with two thirds of Australian households owning their homes.

The uneven nature of the market means such measures, even if they cool the hot spots, can cause collateral damage elsewhere. “There is no one national housing market in Australia. So, what may impact in Sydney in one way can impact exactly the reverse in Perth,” said Scott Morrison, the nation’s treasurer.

“So, the use of big-stick, sledgehammer-type changes, one must be very cautious of that, because it can have quite negative impacts in markets.”

Neighboring New Zealand had been grappling with a similar problem in Auckland until its central bank asked lenders to seek greater deposits for home loans in the city.

The tactic seems to have worked. The explosive Auckland market has cooled since September, with sales volumes at their lowest levels in at least five years, according to the latest data from the Real Estate Institute of New Zealand.

In China solutions are tailor-made to locality, with some cities requiring deposits of 40 percent or more, while others put limits on how many homes an individual can buy or bar non-residents from buying.

More recently, the Reserve Bank of New Zealand (RBNZ) has been lobbying the government to get permission to add debt-to-income (DTI) limits to its macro prudential arsenal aimed at combating the brisk pace of home prices.

“DTI policies can increase the resilience of households to income shocks, reducing the number of forced house sales in a downturn,” RBNZ said last month. Together with loan-to-value restrictions, RBNZ said it hoped to achieve “a more targeted response to rising house market risks.”

That remains just a proposal for now, however.

“There hasn’t been any real political appetite or enthusiasm for DTIs,” said Christina Leung, senior economist at the New Zealand Institute for Economic Research. “There’s a lot of uncertainty” as to what it would do to house prices.

In Australia, such policies won’t wash, said John Hewson, a former leader of the ruling Liberal Party and a professor at the Australian National University.

“We have had a long history of deregulating our financial system, so there is a strong reluctance to start regulating banks with lending restrictions or interest rate caps,” said Hewson,

Regulators are also worried about the risks from a slowdown in the home-building boom. According to official estimates, every A$1 spent on residential construction generates A$1.31 worth of spending elsewhere in the economy, and every A$1 million (US$760,450) creates 17 full-time jobs.

And unlike in China, Australians still largely expect the government to let the market take its course.

“They should ... just sit in a corner and not do a thing,” said Lindsay Partridge, managing director of Brickworks . “Any of the things that they do are going to affect confidence, and that is going to affect construction activity.”

The state governments, Partridge said, “should release more land for construction and just let the market run and correct itself.”


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