Sentiment in Australia’s key housing markets appears to be turning, according to a key Reserve Bank official.
Malcolm Edey, the RBA’s assistant governor, said the level of investor activity in the real estate market was higher than previously thought, but additional measures introduced by the banking regulator appeared to be working.
"There is... some tentative evidence that sentiment may be turning in the housing markets in the two largest cities," namely Sydney and Melbourne, Dr Edey said.
Dr Edey’s comments, made yesterday at a Gold Coast conference, came as National Australia Bank economists lowered their forecast of house price growth for the coming year from 3 per cent to 2 per cent.
“Regulatory changes to address risks in housing credit, particularly investor credit, have tightened conditions in the mortgage market, which is likely to have at least some impact on housing demand, even if only at the margin,” the NAB economists said.
“However, the response from some corners claiming that these factors point to a sharp correction in house prices in the medium term are extreme in our view.”
Dr Edey said investigations by the Australian Prudential Regulatory Authority and the Australian Securities Investments Commission had shown lending standards were beginning to slip. “Specifically, APRA found that in some instances, lenders’ serviceability assessments were based on over-optimistic judgments about the reliability of borrowers’ incomes, or inadequate estimates of borrowers’ living expenses, or that they failed to take into account the possible effect of future interest rate movements on a borrower’s existing commitments,” Dr Edey said.
Despite moves by the regulator to introduce measures to strengthen lending standards — in particular limiting growth in investor lending to 10 per cent or lower — it would take time for their full impact, and that of the more recently announced increases in bank lending rates, to become apparent, Dr Edey said.
Analysts at investment firm Shaw & Partners also weighed into the debate, telling clients the housing “bears” would be wrong again. “House prices are high versus wages, but mortgage payments as a percentage of wages are not out of line with 25-year averages,” Shaw analyst David Spotswood said. “So unless you think the RBA is going to put up rates in the next 12 to 18 months, house prices are not going to crash.”
RBA governor Glenn Stevens, speaking at the Economic and Social Outlook Conference in Melbourne on Thursday, said the official cash rate was likely to stay on hold as home prices appeared to cool and inflation remained under control: “I think everyone knows that were a change to monetary policy be required in the near term, it would almost certainly be an easing, not a tightening.”
Loan payments as a percentage of wages is at 26.3 per cent, according to Shaw, at about a long-term trend and below the levels of two decades ago, when the variable rate was twice what it is now. NAB said housing affordability had not deteriorated as much as the price-to-income ratios would suggest, as those figures did not capture the offsetting positive of lower rates.
“In addition to record low interest rates, a number of years of sluggish growth in housing supply, relative to demand, has helped to allay fears of a severe market correction — at least in certain markets,” they said.