Australian housing values have surged higher, rising at the fastest annual pace since 1989.
Growth conditions have been broad based, with every capital city and regional area recording double digit annual gains in value.
Record low mortgage rates have been central to the lift in housing demand
Sales volumes rose an estimated 41.9% in the year to September and were trending 25% above the 5yr average in September
The high rate of growth in housing values and housing credit growth is occurring against a backdrop of below average income growth
Surging housing values and sales activity has been accompanied by a sustained lift in housing credit.
With low income growth, housing debt is around record highs and a larger than normal portion of borrowers have have high debt levels relative to their incomes.
The surge in housing activity has been accompanied by a sustained period of above average housing credit growth
…and lending to borrowers with high debt relative to their incomes has risen to be more than one in five home loans in Q2
Owner occupier housing debt reached a new record high in the June quarter, while housing debt relative to income was only 24 basis points from record highs.
Together with other factors such as worsening housing affordability, fewer incentives, higher supply and potentially slowing demand, tighter credit conditions are another factor likely to weigh on housing conditions
What is macroprudential?
Essentially, macroprudential policies are rules relating to credit issuance aimed at containing financial risks that could have a broader impact on the financial sector and economy.
• Australia previously implemented macroprudential policies. Initially in December 2014, when APRA imposed a 10% speed limit on investor credit growth and subsequently in March 2017 with rules limiting interest only lending to 30% of new housing loan originations.
- New Zealand has been more aggressive with macroprudential policies, implementing (and revising) loan-to-valuation ratio restrictions since 2013 and will be consulting on implementing debt serviceability restrictions such as debt-to-income ratio
- Owner occupiers will generally need a 20% deposit from Nov 1st (only 10% of loans are exempt)
- Investors generally need a 40% deposit (only 5% of loans are exempt)
- New builds are exempt from LVR
New Zealand: LVR policy changes have been the catalyst for an inflection point in the housing cycle
New Zealand: Investor demand falls sharply due to 40% deposit requirement
Owner occupiers soon to see tightening too – less low deposit lending
Buyer Classification – % share of NZ property purchases
How did markets react to the last round of Australian credit tightening?
Policy changes were focused on investment lending and interest only lending and had a more pronounced impact in areas of the market where investment was most concentrated.
Table 1: Regulatory options to address housing market risks internationally
APRA has a range of options to consider when implementing macroprudential policy
APRA chose to focus on borrower serviceability…
- The higher serviceability buffer reduces the maximum loan size for all borrowers… on average by about 5%
- The impact will be larger for borrowers with existing debt, as the buffer is applied to overall debt levels rather the just the loan being applied
- The impact will be less for borrowers with low existing debt and/or high levels of net income
Comparison of the change to interest rate assessment based on the current average mortgage rate for new owner occupier loans (which was 2.36% through August) and
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