The Reserve Bank has named four of the biggest housing risks at the front of Australians’ minds in its decision to leave rates on hold: rampant price growth, a looming apartment glut, low rents and a landlord resurgence.
As expected, the RBA left its official cash rate target unchanged on Tuesday at the record-low 1.5 per cent.
Inflation has undershot the bank’s target of 2 to 3 per cent for almost three years – a strong reason to stimulate the economy with further cuts. So why hold? Many experts believe the hot property market is staying its hand.
In his official statement, Governor Philip Lowe addressed conditions in the property market, noting that prices are “rising briskly” in some parts of the nation – a fact that has generated a huge national debate over affordability in recent months.
“Conditions in the housing market vary considerably around the country. In some markets, conditions have strengthened further and prices are rising briskly. In other markets, prices are declining.”
The variability is indeed considerable.
Sydney and Melbourne median prices are rising by about 10 to 15 per cent annually and Hobart by almost 8 per cent, while Canberra, Brisbane and Adelaide are rising more moderately around 5 per cent, CoreLogic reported last week.
The big standouts are Darwin and Perth, where prices are reportedly declining.
This “brisk” price growth is causing much distress for first-time buyers because it suggests that saving a deposit for a home loan in most of the capital cities – where the best jobs are found – is getting harder.
It was illustrated by CoreLogic, which estimated that the amount of income that a two-income household would need to save for a deposit was at close to all-time highs for median-priced houses in Sydney and Melbourne.
BankWest, a subsidiary of the Commonwealth Bank, calculated late last year that the average couple would need a deposit of $103,600 to qualify for a loan for a median-priced home in a capital city, up from $87,600 in 2013.
In his statement, Governor Lowe also noted an investor resurgence in the market.
“Borrowing for housing has picked up a little, with stronger demand by investors. With leverage increasing, supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments.”
“Little” could be an understatement. Investors seem to have flooded back into the market, especially in Sydney and Melbourne, after two RBA rate cuts last year.
Loans to investors now make up almost half (49.6 per cent) of new mortgage lending, if you subtract refinancing. This is close to the all-time high of 54.7 per cent in May 2015, just before the regulator cracked down.
Investor loans slackened when prudential regulator APRA imposed new safeguards in 2015 in an attempt to prevent a GFC-style crash. But it looks like they are back.
APRA has placed a 10 per cent annual cap on growth in loans to property investors, forced banks to be more selective when approving investor loans, and demanded that five banks (CBA, ANZ, NAB, Westpac and Macquarie) increase the amount of capital they hold against their exposure to residential mortgages.
Because of this, several big lenders have been increasing fixed rates for households and variable rates for investors to maintain profitability.
Governor Lowe also noted the potential apartment glut and low rental yields – problems that for the average household probably sound more like benefits.
“In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years,” he said of apartments.
And of rents, he said: “Growth in rents is the slowest for a couple of decades.”
But if an apartment glut results in dampened construction in the sector, then it could have extremely detrimental spillover effects on the wider economy, given the importance of construction to economic growth.
The market is eagerly awaiting the Reserve Bank’s full statement on monetary policy, which will be released on Friday at 11:30am.