For those investors in the property market, a quiet read of remarks yesterday from Reserve Bank Governor Glenn Stevens should be in order because he has identified the central bank’s key concern about what’s happening in property markets.
Mr Stevens again got a lot of publicity about his comments on the current high value of the dollar – the currency duly obliged and fell a cent during the day from above 96c to close to 95c.
Mr Stevens’ view though is that it will fall much further, someday.
He was relaxed about property generally, pointing out that higher prices have followed lower interest rates and have bounced from a previous fall – his deputy Phil Lowe said the same thing last week in a speech.
But while Mr Stevens doesn’t reckon there’s a bubble in property – he identified the bank’s concern about what was happening in just one market – Sydney, the country’s biggest – with the involvement of investors. It’s the hottest in the country.
Mr Stevens told a Sydney investment conference yesterday that "some commentators have taken the view that the property market dynamics are worrying. My own view, thus far, has been that some rise in housing prices is part of the normal cyclical dynamic, that it improves the incentive to build, and that a price rise reversing an earlier decline probably isn’t something to complain about too quickly.
"Moreover, credit growth, at between 4 and 5 per cent per annum to households, and less than that for business, does not suggest that rising leverage is so far feeding the price rise. Hence it has been a little too early to signal great concern.
"There are, however, two caveats. The first is that, notwithstanding the above comment, credit growth may pick up somewhat over the period ahead. So this is an area to which we will, naturally, pay close attention.
"Secondly, while overall credit growth remains low at present, borrowing is increasing quite quickly in some pockets. Investor participation in housing in Sydney, in particular, is becoming noticeably stronger. Over the past year, the rate of finance approvals for this purpose has increased by 40 per cent."
Ahh, and according to real estate sources I have, there’s a clash between two separate groups of investors in Sydney that’s helping drive up markets .
There’s the obvious rise of self managed super fund investors, but there’s also a strong presence of offshore investors assembling property holdings to qualify for a visa.
Seeing an investment of $5 million or more gets a free visa, the fastest way is to buy a house for that amount (or a couple of houses).
In fact there was a house in Strathfield (in the outer part of Sydney’s inner western suburbs) which sold for around $5 million six weeks or so ago.
That was a massive $1.5 million above the reserve price and the buyers were said to be offshore investors.
Cheap money raises property concerns in Sydney
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That Mr Stevens singled out Sydney and the rapid growth of investor interest tells us that this is a major area of concern for the bank and for other regulators, such as APRA (which oversees all the banks).
And while he pointed out that property prices were bouncing from a weaker level, "as this activity continues, lenders and borrowers alike would be well advised to take due care. It is very important that strong lending standards remain in place, and that decisions be based on sensible assumptions about future returns.
"That’s what we need if we are to experience a long and sustainable expansion in housing investment that houses our growing population at acceptable cost, and pays reasonable returns on the capital deployed. That’s the sort of outcome we want, as part of the more balanced growth path for the economy we are seeking over the years ahead."
Interestingly, his other comments on the economy and the re-emergence of the wealth factor were also interesting when applied to the background of the current positive state of the property and sharemarkets.
"Turning to the Australian economy, we have seen, over the past couple of months, evidence of a lift in sentiment in the business community. A lessening of political uncertainty has no doubt helped this, though we should note that this follows an improving trend in measures of household confidence that began in the second half of last year. That uptrend had a setback in mid 2013, but then resumed.
"One force helping household and business confidence has been a positive trend in asset markets. Over the past year, the stock market, as measured by the ASX 200 accumulation index, has returned about 25 per cent. The median price of a dwelling in Australia has risen by about 8 per cent over the past 18 months, reversing a previous decline. Overall, the net worth of Australians has increased by around 15 per cent, or more than $800 billion, since the end of 2011.
"It is not yet clear to what extent, or when, these more favourable trends in ‘confidence’ will translate into intentions to spend, invest and employ. The pace of new dwelling construction is starting to respond to higher prices in the established property market, as we need it to. But at this stage, the available information suggests that broader investment intentions in the business community remain subdued. It may be a while yet before we can expect to see conclusive evidence of a change here."
One way of measuring if the rising net worth is influencing investment decisions by households will be the level of savings in the September quarter national accounts which will be issued in early December. The savings rate has been around 10% of GDP over the past three years.
Much of that has gone into deposits, while over half of mortgage holders have been repaying their loans at a rate much faster than they have to.
Both should change in the coming year if there’s a real sea change underway in investment and the impact of the rising level of net wealth. If that happens, it will bring another set of concerns for investors and regulators alike.
Footnote: In a separate speech yesterday, the head of APRA, Dr John Laker also cautioned financial institutions about resisting the lure of lowering lending standards in property.
He singled out high leveraged lending, saying: "You may be aware that the Reserve Bank of New Zealand has placed speed limits on this type of lending in their market. We are keeping our powder dry on that option but we will take supervisory action if an ADI is skewing its housing loan portfolio too heavily in favour of high LVR lending.
"We are also monitoring interest-only lending to owner-occupiers more closely, so that we can understand whether this is sensible lending or a speculative play by the borrower," he told a finance conference.
