The recent spike in Sydney and Auckland property prices is a tale of two booming markets leading to dramatically different regulatory responses.
That’s no great surprise, because the underlying causes of house prices in Auckland surging 17 per cent from a year ago, with Sydney “only” up 14.5 per cent and Melbourne “lagging” at 7.6 per cent, are fundamentally different.
As Luci Ellis, head of the Reserve Bank’s financial stability department, said when asked why the Australian Prudential Regulation Authority hadn’t adopted caps on loan-to-valuation ratios like in New Zealand: “Putting a quantitative limit on high LVR lending in Australia would be like bandaging your arm when you have a headache.”
Last week, the Reserve Bank of New Zealand adjusted the LVR caps it introduced in October 2013, which imposed a limit on high LVR lending due to the rising risk of a sharp correction in the housing market. It was recognised at the time such measures probably had a half-life, with the impact generally front-loaded rather than back-ended.
The policies announced by the RBNZ last week were tailored for the runaway Auckland market, where the median house price is 60 per cent above its 2008 level and prices relative to income and rent are far higher than elsewhere. Investors in the Auckland council area who use bank loans will need a deposit of at least 30 per cent, with the speed limit for high LVR borrowers outside Auckland lifted from 10 per cent to 15 per cent.
At the same time, the 10 per cent speed limit for loans to owner-occupiers in Auckland at LVRs in excess of 80 per cent will be retained.
Consistent with these measures, the RBNZ will also establish a new residential property investor class for banks from October 1 that will attract a higher risk-weighting than loans to owner occupiers.
The investor market, like in Australia, is a target for the central bank, because 41 per cent of Auckland sales are now to investors.
A rising share of investor ownership with high LVRs in an environment of falling rental yields raises the potential for defaults and spillovers into the owner-occupier market.
Our national gateway of Sydney has clear parallels with Auckland. More than half of NZ’s migrants settle in Auckland, and house price growth in both cities is well above the national average, with a strong investor appetite.
Sydney, however, has a higher price-to-income multiple, despite a slower population growth and lower share of the national population.
In terms of policy prescriptions to deal with overheating, the most important difference with Auckland is that the share of high LVR lending -- not just to owner-occupiers but to investors as well -- has actually been trending down.
The key problem in NZ is therefore not an issue in Australia. When this and other factors are considered, it’s no surprise senior RBA and APRA officials have repeatedly downplayed the need for NZ-style macroprudential tools that focus on LVR caps.
The clear emphasis is on loan serviceability, ensuring that banks are being rigorous when it comes to assessing the capacity of households to repay their mortgages.
Unfortunately, as APRA chairman Wayne Byres pointed out last week, that doesn’t appear to be the case. In a recent hypothetical borrower survey, APRA asked some of the major lenders and a few mutuals to provide serviceability assessments for four fictitious borrowers.
He described the outcomes as “a little disconcerting in places” -- regulator-speak for “a real worry”.
There was a yawning, 50 per cent gap between the amount that the most generous and most conservative lenders were prepared to extend, with some banks prepared to make their credit assessments based on lower level of living expenses than the borrower had declared.
Another area was the discount applied to declared rental income on an investment property, and the size of interest-rate buffers applied to the new loan.
APRA has also upped its scrutiny of investor lending, in particular, warning last December that it could impose a capital penalty on banks growing at a rate in excess of 10 per cent.
Local regulators have an advantage over their NZ counterparts in monitoring the segment because they have a long run of historical data showing the split between owner occupiers and investors in the housing market.
At this stage, the data shows there’s less cause for concern than the last time there was a serious correction in the property market, in 2003.
But the longer the current conditions continue, the more worrying it gets.
Questions time
At National Australia Bank, it’s remembered as Black Thursday -- the day that new chief executive Andrew Thorburn drained the bonus pool after announcing a 10 per cent slump in 2014 cash earnings.
It’s no surprise, then, that some senior managers have been approaching the first Step Up, Speak Up (as it’s known at NAB) staff engagement survey since the October 30 bonus catastrophe with more than usual trepidation.
But bankers, if nothing else, are rational people.
With a scorecard in every worker’s hand, and a 40 per cent cut in the bonus pool fresh in their minds, the danger of a negative feedback loop creating another bonus catastrophe has to be averted.
For some staff, the message has become unmistakably clear.
When they get to the survey box that innocently asks the question: “What do you think of your boss?”, a phrase starts ringing in their ears.
It goes something like: “You scratch my back and I’ll scratch yours.”
This article originally appeared in the Australian Business Review.