The Reserve Bank governor, Philip Lowe, has warned the cycle of surging house prices, where people are investing in residential property in the hope of ongoing capital gains, further fuelling house prices, is a risk to Australia’s economy.
He has warned too many loans are still being made to borrowers with the “skinniest of income buffers” and says banks must stop issuing so many interest-only loans.
He has pointed a finger at “taxation arrangements” – negative gearing and the capital gains tax discount – that led to a surge in interest-only loans in the last 12 months.
He has also flagged more regulatory measures from the Council of Financial Regulators if last week’s attempts to curb investor lending do not encourage banks to stop issuing so many mortgages.
It is his strongest intervention yet to the debate about runaway house prices.
“Over the past year, close to 40% of the housing loans made in Australia have not required the scheduled repayment of even one dollar of principal at least in the first years of the life of the loan; only interest payments are required,” Lowe said on Tuesday.
“This is unusual by international standards.”
Speaking at the Reserve Bank board dinner on Tuesday night in Melbourne, Lowe said current problems with specific housing markets in Australia were complicated, and were generally caused by a lack of supply.
But the lack of supply has been exacerbated by easy availability of credit which has amplified demand, he said.
He said banks must pay special attention to their serviceability assessments, because “too many loans are still being made where the borrower has the skinniest of income buffers after interest payments.”
“In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong.”
He said last week’s attempt by the Australian Prudential Regulation Authority to dampen investor lending should help to pull the “whole system” back to a more sustainable position.
This included reducing the proportion of new loans that are interest-only.
“A reduced reliance on interest-only loans in Australia would be a positive development and would help improve our resilience,” he said.
“With interest rates so low, now is a good time for us to move in this direction.
“Hopefully, the change might encourage a few more people to think about the merit of taking out very large interest-only loans when interest rates are near historical lows.”
“The RBA welcomes these latest changes.”
Lowe’s warning comes a day after data showed Sydney property prices surged by almost 20% over the past year, putting the city at the front of a nationwide trend that has seen dwelling values increase by 12.9% on average.
Data from CoreLogic, released on Monday, showed house values in Melbourne (up 17.15%), Canberra (13.64%), and Hobart (11.05%) have followed Sydney’s rapid rise.
On Friday the banking regulator, Apra, wrote to major lenders warning them to tighten their lending practices on investor and interest-only loans.
Lowe said on Tuesday that the Council of Financial Regulators would consider further regulatory measures if Apra’s latest intervention did not work.
However, he also said we must be realistic about what these and other prudential measures could achieve.
“The underlying driver in our housing market is the balance between supply and demand,” he said.
“The availability of credit is undoubtedly a factor that can amplify demand, but it is not the root cause.
“This assessment is consistent with the observation that housing market dynamics currently differ significantly across the country, despite Australia having nationwide financial institutions and the level of interest rates being the same across the country.
“It is hard to escape the conclusion that we need to address the supply side if we are to avoid ever-rising housing costs relative to our incomes and to avoid the attendant incentive to borrow that is created by rising housing prices,” he said.
The RBA left the official interest rate on hold on Tuesday, at 1.5%.