Yes, the Reserve Bank is a tad concerned about the way house prices are rising and yes, a senior bank executive (in fact the Assistant Governor in charge of the Financial system) indicated last week that the bank did not see property bubbles forming.
But after the release of the second Financial Stability report of the year from the central bank yesterday something is certainly worrying the RBA in the housing market, whether it’s bank lending (OK), the prudence of households (OK) and the soundness of banks (also OK).
But the concern was to be found in the Report’s numerous mentions about self-managed super funds and the rising level of investment in residential property.
That was best shown by the reminders to households to maintain their prudence and not become greedy by chasing gains in property; and the reminder to banks about prudent lending and not to go chasing market share and profit growth by lowering lending standards.
But above all, it was very visibly fretted about the emergence of self-managed super funds in the negatively geared investment housing market that was the central concern of the latest Financial Stability Report for the year.
You can take it from me, the investment activities of self managed super funds, their financial and other advisers and the lending policies of the banks will be front and centre the major area of focus for ASIC, APRA and the RBA.
Just as August’s third Statement of Monetary Policy for the year contained a string of references to the joys and benefits of a weaker dollar, so yesterday’s Stability Report contained numerous reminders to the reader about the need for everyone to keep their heads with property, especially those involved with self-managed super funds.
Falling rates trigger housing boom, but the big danger is in self managed super funds
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Reading the Report and the numerous mentions about self-managed super funds and property investment, it is clear this is not just a friendly reminder to banks, super funds and others about acting and investing prudently. For a conservative regulator like the RBA, this is a warning with a capital W.
The very public message is that the rapid rise in house prices in recent months (especially in NSW) isn’t that it will inflate into a bubble, but that a bunch of small super funds, holding an estimated half a trillion dollars in assets (nearly a third of the $1.6 trillion in the entire super sector) are at risk.
The central bank said Australian households continued to show prudence in managing their finances compared with 10 years ago, with a higher rate of saving and a slower pace of credit growth.
This included taking advantage of low interest rates by paying down their existing mortgage debts (which we have known of for several years) and other debt. But the RBA also urged banks and households alike to maintain current standards.
“There are some signs that households are taking on more risk in their investment decisions,” the RBA said. And it then mentioned the other areas of interest, the rise of self-managed super funds as property investors.
“The potential for a further increase in property gearing in self-managed superannuation funds is a development that will be monitored closely by authorities for its implications, both for risks to financial stability and consumer protection." That’s what RBA said in last week’s RBA Board meetings from its meeting earlier this month.
“While increased financial risk-taking is an expected outcome of lower interest rates, it is important that households understand, and appropriately account for, the financial risks they take. Given that household indebtedness and gearing are still around historically high levels, continued prudent saving and borrowing behaviour would help support households’ ongoing financial resilience.
"An increase in housing market activity more generally is not surprising given reductions in interest rates. However, it is important that those purchasing property maintain realistic expectations of future dwelling price growth.
‘‘In contrast to the decades leading up to the crisis – when dwelling prices grew rapidly in response to disinflation and financial deregulation – long-run future growth in dwelling prices might be expected to be more in line with income growth." In other words, investors and home owners should be greedy and look for high price gains from the unfolding rebound in residential property.
The RBA said data showed that banks had broadly maintained their lending standards since late 2011, although the share of high loan-to-valuation ratio approvals by smaller institutions such as credit unions and building societies was trending upwards.
"The relatively modest rate of growth in credit, and hence bank balance sheets, poses a strategic challenge for Australian banks,” the RBA said. In other words, the central bank (no doubt with the support of co-regulator APRA) has also warned banks not to get greedy and go looking for rapid revenue and profit growth by cutting lending standards – as many did a decade ago and in commercial property and corporate lending in the run up to the GFC in 2005-07.
And to undermine the importance of self-managed super funds, the bank devoted a separate article to them and this explanation in the Report’s foreword, with an added bonus of a reminder that the boom in super funds and private investors’ investments in bank and other corporate hybrids.
"In this issue of the Review, a particular focus has been placed on the self-managed superannuation fund (SMSF) sector.
"Although this sector does not currently pose material risks to financial stability, it is important for the financial position of the household sector and has a number of aspects that warrant careful observation in the period ahead. Changes to legislation in recent years have permitted superannuation funds, including SMSFs, to borrow for investment, for example to purchase property.
"Since then, property holdings by SMSFs have increased and this type of investment strategy is being heavily promoted. The sector therefore represents a vehicle for potentially speculative demand for property that did not exist in the past.
"SMSFs and other retail investors have also been the dominant class of purchasers of hybrid securities recently.
"These investors seem to have been attracted by the higher yields offered on hybrids compared with conventional debt securities; it is important that they fully appreciate and price in the risks embedded in these more complex products."
That’s a big red flag from the RBA (and APRA) that they see self-managed funds as being doubled exposed in the event of a property crunch. The funds are firstly exposed by direct investment, and then through their holdings of these hybrids issued by the same institutions funding the move into housing investment. And should the banks get crunched, they have the ability to postpone interest payments on these hybrids, which will hurt the holders.
The report is worth a read, if only to inform yourself.
