Property investors and investors in financial groups operating in the home loan market – especially the big four banks – had better start preparing for a crackdown in the next couple of months by key regulators (and the Federal Government) to try and stop the developing bubble in apartment buying by investors and the financing of the construction of those apartments from damaging the financial system and the wider economy.
Yesterday’s December quarter house price index from the Bureau of Statistics showed a 4.1% quarterly rise in national housing prices, with bigger rises in some cities. But that didn’t tell much that we did not know – the index is based on the monthly and quarterly Corelogic data that is published at the start of each month and quarter, so no real shocks, really, despite the noisy commentary from some sections of the media about bubbles and booms.
The real story came in the wording of one paragraph in the March board meeting minutes of the Reserve Bank:
“Recent data continued to suggest that there had been a build-up of risks (our emphasis) associated with the housing market. In some markets, conditions had been strong and prices were rising briskly, although in other markets prices were declining. In the eastern capital cities, a considerable additional supply of apartments was scheduled to come on stream over the next few years. Growth in rents had been the slowest for two decades. Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income. Supervisory measures had contributed to some strengthening of lending standards.”
Contrast that to the comment in the February board meeting’s minutes which suggested the property sector while hot, was under control and cooling in some areas:
"Conditions in housing markets varied considerably across the country. Housing prices and rents had been falling in Perth and there were signs that the significant increase in the supply of apartments had begun to affect prices and rents in Brisbane. In contrast, activity in the established housing market had picked up in Sydney and Melbourne in the second half of 2016, and investor credit growth had increased. Supervisory measures had strengthened lending standards and some lenders were taking a more cautious attitude to lending in certain segments.”
Now there’s a belief that the sector, especially apartments is no longer cooling, or under control and that the risks have suddenly escalated in a month.Those significant changes in the March minutes confirm that whether it’s a boom, or just bouncy, there’s a crackdown coming from the key regulators, the RBA, APRA and ASIC against the financing of apartment purchases by investors, as well as against the financing of the developers of those apartments.
The regulators, led by the RBA increasingly worry there’s a crash looming if the bouncy market isn’t controlled sooner than later. They want to bring the sector under control before the crunch happens and possibly drags the financial system and economy down with it, just as happened in the early 1990s.
Underlining its concern, the RBA’s use of the phrase “build-up of risks” shows the extent of the growing concern at the top of the central bank. And rather than worries in Sydney and Melbourne, and perhaps Brisbane, the central bank now sees the problems up and down eastern Australia – “In the eastern capital cities, a considerable additional supply of apartments was scheduled to come on stream over the next few years.”
The problem is no longer just confined to Melbourne and Brisbane, as the bank sort of thought late last year and earlier this year. The concerns are now much wider and deeper and therefore “there has been a build up of risks”. And those risks are not just to the buyers and sellers, but to the banks and other financiers many of whom are on both sides of the equation.
The March key paragraph dropped this “some lenders were taking a more cautious attitude to lending in certain segments.” from the February minutes The central bank and other regulators clearly no longer believe that (the omission from the March statement confirms that) caution is being shown by ‘’some lenders”. In the view of the RBA there are no lenders taking a more cautious attitude to lending in certain segments.”
The regulators are especially concerned that self-managed super funds – already the largest single of groups of investors in the big banks – have leveraged up their funds to invest firstly in detached housing, and increasingly in apartments. That is a recipe for a crisis if apartment prices in particular start falling.
On the other side of the equation regulators worry that banks and other financiers have allowed developers to limit their capital contributions by basing their financings on rising land and property values (known as valuation uplift) which comes apart when prices start falling.
The federal government is expected to use the May budget to reveal a series of measures designed to boost affordability for actual home buyers and clamp down on those loading up on debt and buying multiple investment properties.
Westpac, the ANZ and NAB balance their first half results on March 31 – the provisions for impaired loans could make interesting reading as the year rolls on.
The next commentary from a regulator could come in the next week with Deputy Governor, Guy Debelle due to make two speeches – one in Singapore Wednesday and one in Sydney next Tuesday.
But seeing they are to foreign exchange conferences, it is not likely he will say anything in the formal speeches (he is in change of global effort to reform the forex markets after the price fixing charges in London and other markets, such as Australia). But he could say something in any Q&A, especially in Sydney on March 28. But Mr Debelle’s next public outing at the Financial Review’s banking and wealth summit on April 6 in Sydney in the one to watch.
Between those two, Alex Heath, head of the RBA’s Economics analysis department pops up at a Sydney talkfest on April 5 and will no doubt find cameras and microphones pointed in her direction.
These speeches come after the RBA board meeting on April 4 – the post meeting statement will be analysed a little more closely because this meeting will see the board also discuss (and possibly change) the wording of the first Financial Stability Review of the year.
That will be published on April 13 (Easter Thursday) and will contain the RBA’s latest thinking on the stability and risks from the housing boom. Then it’s waiting for APRA’s next letter to lenders directing certain changes and other moves. In other words, a crack down is on the way.