The Reserve Bank has stepped up the level of its rhetoric on the housing boom – especially the high level of buying by investors – and the potential dangers to the Australian economy.
In the minutes of its September 2 monthly board meeting, released yesterday, the bank has toughened its warnings on the housing boom on two fronts – through the minutes of the regular board discussions and through a brief look at what will be the central part of the second report on financial stability for the year, to be released a week today.
The minutes contain some of the most pointed comments from the bank on the possible dangers of the housing boom, even tougher than the blunt warnings earlier this month (and late in August) from Governor Glenn Stevens, who reminded us that property prices can fall, and surprise us when they do, to our financial loss.
This is not to say that the RBA isn’t still concerned about the high value of the dollar (it is) or the weak level of non-mining investment or the current level of household spending. It is, but from the contents of the minutes released yesterday, property, especially housing (and soon commercial) are now top of the list of big concerns.
But this all remains a form of ‘jawboning’ – like the comments Mr Stevens and other RBA officials have been making about the high value of the dollar.
The bank’s comments in the minutes add to the already high level of publicity this week on house prices and whether the housing sector is in a ‘bubble’ and the likely damage to the economy.
From private and business economists and writers to the Bank of International Settlements in Switzerland, the warnings claimed the booming housing sector and prices contained dangers for Australia.
And in reply economists and commentators (including Federal Treasurer Joe Hockey) have rejected talk of a bubble.
And while that’s the belief of the central bank, it still sees considerable dangers to the economy from an overheating property sector.
The RBA warned that surging investor demand for housing may cause the market to overheat and invite sudden price falls.
“Dwelling investment had expanded further in the June quarter and that leading indicators pointed to continued growth in the months ahead. For new dwellings, loan approvals and first home owner grants had increased strongly over the year and dwelling approvals remained at a high level despite having declined a little since late last year.
“At the same time, a wide range of indicators showed that conditions in the established housing market continued to strengthen.
“In particular, housing prices had been rising at a rapid pace and auction clearance rates were above average levels.
"Housing credit had continued to grow at an annualised pace of around 7 per cent, with investor credit a particularly strong component,” the RBA said.
And the while the current record-low level of interest rates was supporting the economy, it added there are risks to future growth.
“Investors continued to look for higher returns in response to low rates on safe instruments and were accepting more risk in doing so. Credit growth had picked up, including to businesses. Credit growth for investor housing was running at around 10 per cent per annum.
“Housing prices were continuing to increase in the larger cities and members considered that the risks associated with this trend warranted ongoing close observation,” the minutes said.
But the most interesting comments came in the discussion of the second financial stability report for 2014, which is due for release a week today.
In it the Reserve Bank revealed it will step up the level of its concern about the current boom with housing and house prices be top of the agenda.
Three of the six paragraphs in the minutes which discussed the financial stability report were devoted to property and house prices.
These read:
"Members noted that Australian banks continued to report improving asset performance and strong profits, which had contributed to further increases in their capital ratios. Australian banks and non-banks had both benefited from easier wholesale funding conditions globally. This in turn had encouraged stronger competition in lending for housing and to large businesses, but members noted that this had not, to date, led to a general easing in mortgage lending standards and policies. For investors in housing, the pick-up in housing credit growth had been more pronounced than for owner-occupiers, with investor demand particularly strong in Sydney and, to a lesser extent, Melbourne.
"Members further observed that additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later. The main risks in such a scenario would likely be to the stability of the macroeconomy rather than the financial system, particularly if households were to react to declines in their wealth by cutting back on their spending. Members were also updated on some of the recent actions by the Australian Prudential Regulation Authority in this area."
And there was a further interesting area of comment about property in the minutes:
"Members noted that commercial property markets in Australia had also been quite buoyant recently. Australian property had been yielding higher rental returns than were available overseas, which had attracted strong demand from both local and foreign investors. This had boosted prices even though rents for some types of commercial property had declined. In contrast, demand for finance from other parts of the business sector remained subdued, although business credit growth had picked up a little in recent months."
Traditionally Australian banks and the economy generally first feel the impact of a property bust in the commercial sector.
That’s why it’s watched very closely by the RBA and the other regulator, APRA. They monitor the banks’ detailed lending data in the sector, and especially the level impaired, past due and weakly performing loans.
That’s not to say the RBA isn’t as interested in the banks’ detailed lending data for housing. It is, but the data on loans to investors, their loan to valuation ratios and level of interest cover would be closely scrutinised, as would similar details for new loans to owner-occupiers, especially after APRA told the banks they had to be more aware of just who their borrowers are and the state of their finances.
