Will APRA remove some of the fuel from the housing fire?

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Will APRA remove some of the fuel from the housing fire?

The Reserve Bank of Australia recently released private sector credit data which showed another month of strong growth. The RBA has raised concerns regarding the rate of growth in lending on speculative assets, and housing in particular, for some time. Glenn Stevens stated recently that he views some developments in the Sydney property market as “crazy” and “acutely concerning”.

The RBA has been lowering interest rates to provide policy support in the hope that it will drive increased investment by business. With fiscal policy all but fully utilised as an economic stimulus given the size of deficit, and reforms that would allow productivity growth to improve proving difficult to realise, monetary policy is the only lever available to prop up the economy at present, outside a large currency devaluation.

However, investment has remained weak in Gross Domestic Product figures as the resources boom continues to wind down. Instead, it appears the lower interest rates are largely fuelling a speculative bubble in Sydney and Melbourne property. Credit growth on investment housing increased 10.4 per cent on the prior year in May. This compares to business credit growth of just 5.4 per cent.

APRA (Australian Prudential Regulation Authority) has been flagging the potential to impose penalties on housing lending if the banks do not voluntarily curb lending to this segment of the market. However to date APRA’s action has been confined to jawboning. APRA wants to see investment property credit grow no more than 10 per cent a year.

As we saw in the post GFC property market in the US, the availability of mortgage finance can have a significant impact on property prices, even if interest rates are low. Improved housing affordability means little if banks cannot provide mortgage funding.

Interestingly, mortgage approvals pulled back 7 per cent in May relative to April. This could signal that APRA’s message is starting to be heeded.

Restrictions on the supply of funds available for mortgages would have implications for the current momentum in Sydney and Melbourne property prices. Additionally, the cost of mortgage funding could rise relative to the RBA’s cash rate to offset the cost of any additional prudential costs introduced by APRA if the banks force APRA’s hand. Of course for the property market, locally financed buyers are only one source of demand, albeit a very significant one. This would have limited impact on demand from overseas buyers and those buying without financing.

Any regulatory curbs on housing lending would reduce the rate of growth in the loan books of the banks. This is because the banks would not be able to shift their focus from housing to business without an increase in demand for lending from that segment of the market.

Stuart Jackson is a Senior Analyst with Montgomery Investment Management. To invest with Montgomery, find out more.

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Stuart is the Portfolio Manager of The Montgomery [Private] Fund. Stuart joined Montgomery in 2015 after spending 19 years in research roles with JP Morgan in Australia and in New York. Stuart was appointed Executive Director at JP Morgan in 2005 and for 8 years was Deputy Head of Research. Prior to this he worked as an analyst in the Australian Equities team at Bankers Trust Asset Management for 3 years. Stuart is a CFA® charterholder.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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3 Comments

    • Hi Peter, The RBA undoubtedly expected lower interest rates in positively impact property prices. Indeed, the RBA would have been hoping that lower interest rates would trigger an increase in construction activity, which has also occurred. However, its primary aim was to boost business investment to offset the impact of the decline in mining investment on GDP growth. Instead, the impact on house prices has been far greater than hoped while the lift in business investment has been disappointing.

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