Buying a house or apartment in Australia is becoming increasingly difficult, especially for those who already find it difficult.
This is not because interest rates are unlikely to rise in the near future. In contrast, the Reserve Bank of Australia sets a prime cash rate that exceeds any other interest rate to affect home loan costs – and the bank has hit the floor.
And it’s not just because prices are rising – although they clearly are. As just reported by property data company CoreLogic, prices nationwide rose an average of 1.5 percent in September and 20.3 percent year over year in September. Those who watch the housing market closely expect further growth.
It may seem a paradox when the economy is under lockdown stress, but there is no doubt that housing is booming.
Instead, life will be tougher for the aspiring home buyer as regulators are creating a brothel called the “macro-prudential regulation” – so named because it aims to regulate lending for housing so that a foamy housing market risk can be reduced. broader economy and financial stability.
Similar devices are being used in other countries, and Australia has used them before; In 2014 and 2017, regulators acted to curb investor and interest-only lending.
This time around, the boom is focused on owner-occupied loans, but investor activity is stirring as well.
Last week, in rapid succession, we saw the CEOs of the International Monetary Fund (IMF), the Reserve Bank and the Commonwealth Bank make statements about the need to curb the boom. And then Federal Treasurer Josh Frydenberg confirmed that regulators are working on the issue.
It’s almost as loud as drums ever to warn of an impending change.
It really tells us something when Matt Comin—the CEO of Commonwealth Bank, the nation’s largest mortgage lender—says publicly that he is “increasingly concerned” about rising housing loans and prices. Put another way, he wants action to quell the boom in a sector that accounts for a large portion of his bank’s impressive profits.
The issue is viewed as high debt-to-income mortgages at a time when Australia’s household debt-to-income ratio is already very high by historical and international standards.
And the higher the bid on home prices, the greater the risk of a recession.
This is not as much of a threat to banks as it would have been in the past, as they are very well capitalized. Still, their profitability will take a hit.
Rather, the main threat will be to the domestic sector and from there to the wider economy. If incomes decline in an economic downturn or if—or when—interest rates rise from current very low levels, repaying loans will become difficult.
Household spending will suffer across the board, consolidating the economic weakness. Furthermore, if home prices decline, a negative money effect would have the same effect.
Organizations such as the IMF are now sounding the alarm, knowing from experience that the worst economic downturns are usually associated with housing recessions.
The measures regulators are now looking at are stricter debt service testing for mortgage applicants (that is, testing applicants’ debt servicing ability at higher interest rates) and restrictions on debt-to-income and loan-to-appraisal ratios. .
These will drive some potential buyers out of the market and reduce the amounts that others can borrow.
But there is a sense in which macro-prudential regulation is treating one of the symptoms of a more far-reaching problem—namely the addiction to cheap and plentiful money and financial markets and the economy.
The Reserve Bank has not only set its cash rate at the lowest level, but it is also continuing with the “print printing” exercise of quantitative easing.
The conventional wisdom is that the bank has to continue on this path until unemployment subsides and inflation rises to a target range of two to three percent.
However, one cannot help wondering whether the day of cheap and plentiful money has arrived, and it is time to try something that does so much to bolster the asset markets and reduce the cost of capital. will not.
The housing boom is the most obvious sign of asset inflation. Other manifestations include skyrocketing share prices (despite recent volatility) and brisk acquisition activity.
In this setting, macro-prudential regulation looks like simply sticking a finger in a hole in a dam—even if it is the largest hole.
Clearly, interest rates cannot be set in line with the conditions of the housing market alone. And right now, the sudden withdrawal of monetary support will be too much for the economy and markets to bear.
But with a longer-term outlook, policymakers will need to move away from over-reliance on cheap and plentiful money and strengthen the economic foundations that determine productivity growth and the economy’s potential growth rate.
They also need to address the high cost of housing by easing restrictions on the supply of housing in the form of planning, zoning, infrastructure and transportation policies.
The views expressed in this article are those of the author and do not necessarily reflect the views of The Epoch Times.
This News Originally From – The Epoch Times