Sydney’s property boom is threatening the economy – right? Yep The Reserve Bank has said just that and in fact the central bank also says the property boom in Australia’s biggest city threatens to unbalance the wider economy and the financial system. Sydney’s property boom is being driven by investors, especially self-managed super funds and foreign buyers (predominantly from China).
So why can’t Australia’s banking regulators – specifically APRA – follow the move yesterday by the Reserve Bank of New Zealand (RBNZ) to crackdown on investor lending in the hot Auckland market?
The investor housing boom in Australia is proving to be very resistant to ‘jawboning’ from APRA and the RBA – lending is supposed to be capped at 10% a year, but it rose to 10.4% in the year to March, according to RBA data. And figures Tuesday from the Australian Bureau of Statistics on home loans for March showed a 6.4% jump in investor lending in March alone from February, four times the rate of the 1.6% rise in loans to owner-occupiers.
APRA has inspected the books of all Australian lenders in the March quarter and is expected to reveal some sort of action shortly – but it has even said that we might not know what action has been taken, such seems to be the odd view at APRA about transparency and information.
And yet the RBNZ has, after months of discussions and analysis, decided to take a big stick to investor lending in Auckland, and to a lesser extent elsewhere via lifting the required deposit size for investor home loans, and by forcing the country’s banks (dominated by our big four, the Commonwealth, Westpac, ANZ and NAB) to separate all their investor loans into a separate group of loans and allocate more capital because the RBNZ says these loans are riskier.
Seeing the Big Four have rolled over in NZ, they will have no reason to oppose a similar move here.
The RBNZ revealed the move in its latest Financial Stability Review issued this morning. "Auckland’s median house price is 60 percent above its 2008 level, and house prices in Auckland have been rising rapidly since late last year. This reflects ongoing supply constraints and increased demand, driven by record net immigration, low interest rates and increasing investor activity.
"Prices in the Auckland region have become very stretched, increasing the risk of financial instability from a sharp correction in prices,” the RBNZ explained. Figures out this week showed property prices in Auckland were up 17.7% in the year to April, although they were steady in the month.
That was between two and three times the size of the rises elsewhere – in fact some property prices fell – such as in the middle of Auckland itself.
The RBNZ will force investors to boost the size of deposits for investor loans with high LVRs (Loan to Valuation ratios) to a minimum of 30% for the Auckland area, and from 10% to 15% for investors outside Auckland.
But owner-occupiers will not have to find more than the current 10% deposit for loans with an LVR greater than 80%. The Kiwis have also classified residential property loans as any retail mortgage secured on a residential property, but not owner-occupied (which would go well here).
But there’s a further sting – for the banks (especially for our big four which have around 80% of the NZ home loan market). The RBNZ has told them they have to hold more capital against residential property investor loans. Banks will have until June 30 next year to rework their accounts and find more capital (which will crimp profits from their NZ operations). The changes to LVRs for property investment loans start October 1.
Much of this package had been expected – but next month. It tells us the RBNZ is very worried about the boom in Auckland and decided to force the banks to do something they have not done and curtail their investor loans, or make them far more expensive.
The RBNZ wants to do this to allow it to start cutting interest rates – the ANZ said yesterday that it now thought the central bank will cut its official cash rate twice, from 3.50% to 3% by the end of this year because of the sharp fall in dairy income and weak inflation.
Like the RBA, which is very concerned about Sydney’s property boom, the RBNZ wants to bring the Auckland investor boom under control and has provided a guide for the RBA and APRA here which have so far failed to slow the growth of investor loans here.
Both have seemingly ruled out following the RBNZ down the macroprudential controls route (which the RBNZ first introduced in October 2013 to control high LVR lending, then modified in just over a year ago to avoid crimping new home building lending). It’s an old story – if the situation is as worrisome as APRA and the RBA say it is in Sydney (and to a lesser extent in Melbourne) then do something about it – just don’t keep talking about it.
