The Reserve Bank of Australia is facing increasing pressure to put the brakes on a runaway housing market.
Owner-occupiers are flocking to the market, with record clearance rates and prices being driven by the RBA’s insistence that it will keep the cash rate frozen at its current record low of 0.1% until at least 2024.
Annualised price growth exceeded 20% on an annual basis last month, according to Su-Lin Ong, chief economist at RBC Capital Markets. Meanwhile, RBA Governor Philip Lowe is already taking initial steps for new macroprudential policy to cool superheating home prices, according to The Australian Financial Review.
Sydney’s auction clearance rate hit 91% last weekend, while Adelaide hit 89%, Canberra 88%, Brisbane 81% and Melbourne 80%, according to clearance data from Domain. Some analysts predict price growth of 20% to 30% from pre-COVID-19 levels, AFR reported.
Meanwhile, predictions that the RBA will have to step in keep coming. RBC said that the central bank’s options include a limit on the percentage of high loan-to-value loans, a mandatory percentage of lower loan-to-value loans, higher interest-rate buffers on borrowers, and more stringent scrutiny of borrowers’ income and expenses.
“Even assuming some [macroprudential] measures in Q4 and some easing in house price growth in Q2 post the end of JobKeeper and Homebuilder, nationwide house prices are likely to move higher for much of this year and next,” Ong told AFR.
The last time the central bank imposed macroprudential lending restrictions, it was responding to price hikes largely driven by buy-to-let investors in 2014-15 and 2016-17. However, RBC said this cycle is different, as it is largely being driven by owner-occupiers.
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The RBA loosened its credit lines to commercial banks last year to help mitigate the economic impact of the COVID-19 pandemic, and in 2019 the Australian Prudential Regulation Authority scrapped the requirement that lenders use a minimum interest rate of 7% to assess borrowers’ ability to repay. However, more and more market watchers expect that regulators will have to revisit some of those restrictions in order to throw a little cold-water on the red-hot housing market.
Not everyone agrees that new lending restrictions are around the corner. An analysis by CoreLogic last week concluded that mortgage rules in Australia were unlikely to change in the near term. The analytics firm said that while the proportion of loan originations that could be higher-risk rose slightly in the December quarter, there was no evidence of a “major deterioration in lending standards.”
Even with the possibility of tighter lending rules, RBC predicted that national house prices will gain about 12% this year and another 8% in 2022.
“Sustained low rates, a firm labour market and the gradual return of net migration – albeit slowly and initially concentrated in skilled [workers] and students – will provide underlying support to prices,” Ong told AFR.