Investors and speculators in Australia’s property market would be right to feel unsettled by the dramatic actions taken by the Reserve Bank of New Zealand this week to dampen the hot housing market in Auckland.
The central bank announced minimum deposit levels of at least 30 per cent for any investment loan to buy property in the Auckland area as it tries to cool what it describes as “very stretched” prices.
The RBNZ faces a similar situation to the Reserve Bank of Australia: nearly all the action concentrated in one overheated market, with slow to sluggish growth in the rest of the country. House prices in Auckland have surged 17 per cent from a year ago; in Sydney they are up 15.5 per cent and Melbourne is lagging with a 7.6 per cent rise, according to CoreLogic.
The targeted move by the Kiwi central bank was one of three significant developments on the housing front this week that have been swamped by the focus on the federal budget.
The Australian central bank released a cache of “highly restricted” internal documents on budget day itself under the Freedom of Information Act, which suggest its concerns about imbalances in the housing market and the risks to the economy are greater than it has let on in public.
Then ratings agency Moody’s Investors Service put out a report saying the rising chances of an eventual “correction” in housing pose risks for the major banks.
This amounts to a triple whammy from senior economists increasingly worried about rising risks and distortions in the housing market in a low-rate environment.
Last weekend’s auction clearance rate in Sydney hit 89 per cent, up from 87 per cent in the prior week. National figures this week showed lending to investors topped 21 per cent annual growth in March, twice the pace of growth the prudential regulator has said would be nice, before the latest rate cut.
Record-low interest rates have clearly trumped the Australian Prudential Regulatory Authority’s first attempt in December to tamp down investor lending.
The Reserve Bank’s concerns were revealed in a set of documents including internal emails, a staff briefing and a presentation to a weekly financial stability meeting dating from late last year, before the RBA’s February and May easings reignited the Sydney market.
To achieve “some comfort” about leverage in the investor market, internal RBA analysis reviewed options to limit credit growth to rates between 4.5 per cent and 7 per cent -- about one-quarter to one-third the current pace of credit growth.
While the effects of implementing prudential policies such as this were uncertain, “the costs of inaction may be very high,” one slide in the internal presentation on October 15 warned.
In a set of briefing notes dated December 10, the RBA described APRA’s policy response as an “incremental response to an incremental increase in risk”.
No such qualms for RBNZ governor Graeme Wheeler. Alongside the new 30 per cent minimum deposit for investors, Wheeler said banks will be required to hold more capital against investor loans to reflect their inherently higher risk profiles.
New Zealand’s policymakers are worried about both the economic risks of a housing bubble and the potential impact on banks of a downturn. It seems previous limits on investor lending have not done enough to cool the Auckland market.
APRA has been reluctant to move down New Zealand’s path. It is working with individual lending institutions to tighten assessments of potential borrowers after finding “less than prudent” practices in a hypothetical borrower survey. Chairman Wayne Byers says the authority will be closely watching over the second half of this year to ensure that investor lending is moderating.
Moody’s analyst Ilya Serov said in a report to investors this week that sustained price appreciation and rising household debt meant Australia’s housing market risks are skewed to the downside.
Despite low interest rates, a record 35 per cent of household income is needed to make repayments on a Sydney mortgage, where the median house price is expected to reach $1 million this year. Housing debt is at a record 140 per cent of disposable income and according to Moody’s, it now takes 14 years to save for a deposit on an average home. Wage growth is slowing.
“These trends pose a threat to Australian banks because they increase the risk of an eventual correction in the housing market,” Serov warned.
The public actions of the New Zealand central bank; the private concerns of the RBA; the risks raised by credit analysts. These three signals in the past three days should ring alarm bells for investors and bankers across Sydney and, to a lesser extent, Melbourne.