Two of the nation’s most powerful bodies, the Reserve Bank and Treasury, have ramped up pressure on banks to tighten lending amid Sydney’s property “bubble” and backed a probe into the lenders’ fat margins on $33 billion in credit card debt.
Ahead of the RBA’s interest rate decision today, new Treasury secretary John Fraser intensified the speculation around the monthly meeting by conceding Sydney’s hot property market was “unequivocally” in a bubble as record low rates potentially encourage “overinvestment” in housing.
While there was little evidence of a national bubble, Mr Fraser indicated higher-end areas in Melbourne were also being mispriced.
The concerns were backed by RBA assistant governor Malcolm Edey, who said that while banks had historically experienced “very low” losses from housing, “we don’t want to be complacent about it because we do have these boom conditions in the housing market and housing lending is a much bigger proportion of banks’ balance sheets now than it’s been in the past”.
The government’s Murray financial system inquiry raised similar concerns, recommending forcing the banks to increase capital levels to provide a greater buffer against their property books and reliance on foreign funding.
The Australian Prudential Regulation Authority has flagged imposing some of the inquiry’s capital measures in coming months and also threatened capital penalties on banks increasing mortgages too aggressively amid hot competition.
“A lot of people do think it’s a bubble — serious people think that — and we agree that this is a situation where the market is strong, it’s overheated, it’s a risky situation,” Mr Edey told the Senate estimates committee.
“(House price upswing cycles) work in reverse as well. And it can be a destabilising influence for the economy as a whole.
“These cycles are associated with leverage and it’s the combination of leverage with the house price cycle that can get households and financial institutions into trouble if the cycle is severe enough.”
Amid an ongoing debate on negative gearing, Mr Edey said that, while the tax system encouraged debt-financed asset purchases, it could not be blamed for specific cycles and would have to be assessed holistically.
Mr Fraser and Mr Edey also vowed to support an investigation into the record high difference between the cash rate and the banks’ credit card interest rates — which have held around 17 per cent since the global financial crisis, according to Canstar.
Shares in the big four banks fell yesterday, led by ANZ’s 1.4 per cent decline.
Regulators received mixed signals yesterday, with national house prices dipping 0.9 per cent last month in just the second decline in the past year, according to RPData.
With Sydney’s auction clearance rate topping 87 per cent at the weekend and the prospect of further RBA rate cuts, the property market is tipped to remain strong.
But cracks are starting to appear in certain markets, such as Melbourne units, where prices have fallen 4.4 per cent in two months — Goldman Sachs economist Tim Toohey said that fall “bears watching”.
The RBA is widely expected to today keep the cash rate at a record low 2 per cent after cuts in February and last month.
Since the RBA began chopping the cash rate from 4.75 per cent in late 2011, Sydney house prices have surged about 40 per cent in an investor-fuelled boom. APRA in December stepped in to cool the market, warning banks to cap lending to investors at 10 per cent a year and ensuring borrowers can repay under sharply higher interest rates.
But with the mortgage market continuing to breach the investor speed limit, APRA chairman Wayne Byres last month warned banks they had had “long enough” to comply and it would be “watching carefully” for growth to moderate in the second half.
The big four banks responded by winding back discounts for investor loans, capping higher loan-to-value lending and scrapping cash incentives.
Mr Edey said banks were clearly responding to APRA’s warnings, but it could take “another three months or so” for slower investor lending to show up in the data given the “information lag”.
In New Zealand, persistent house price growth has prompted new stricter “macroprudential” rules on the big four, including requiring more capital to write investor loans and a 30 per cent deposit from investors buying in Auckland.
JPMorgan analyst Scott Manning last week said Sydney could face similar restrictions.
This article first appeared in The Australian Business Review.