Australian regulators hint at upcoming crackdown on home loans

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Australian regulators appear poised to implement some measures to curb the rate at which house prices are skyrocketing in the country, as the latest comments from the country’s treasurer Josh Frydenberg indicate.

According to a statement by the country’s finance minister following a meeting with regulators where current housing market conditions were discussed, the economy appears “well positioned to recover as restrictions grow. relax “and this force should serve as an appropriate configuration to implement macroprudential policies to alleviate some pressure on prices.

Residential property prices – Quarterly% change – Source: Australian Bureau of Statistics

The treasurer further said that these measures are aimed at preventing instability in the real estate market amid a worrying increase in the volume of bad debts and investment-oriented loans.

According to data from the Australian Bureau of Statistics, the volume of new home loan commitments – excluding refinancing – has nearly doubled from its post-pandemic low of $ 16.66 billion in May 2020 to reach $ 32.12 billion end of July.

Meanwhile, investment loans climbed near their peak of $ 10 billion in 2015, indicating that some speculative activity could help push prices up in the current environment of low interest rates. ‘interest.

Low interest rates encourage buyers to invest

australian property rates
Australian Housing Rates – Source: Reserve Bank of Australia

Reserve Bank of Australia data shows the extent of the drop in house rates amid the expansionary monetary policies adopted by the central bank during the virus crisis, with the average rate assigned to new loans currently standing at around 2.7%.

For owner-occupied home loans, new loans can be approved at a rate as low as 2.32% per annum, while for investment-oriented operations, the rate for new loans is also extremely low at 2% per annum. , 74%.

This favorable environment pushed the average home price up in the country’s eight major capitals by 16.8% in the twelve months ended June while the 12-month advance in some cities like Sidney, Canberra and Hobart exceeded that. figure.

For authorities, an overheating housing market could lead to increased systemic risks as borrowers may feel too comfortable taking on more debt than they can afford, especially on investment transactions.

What policies could be implemented to alleviate the pressure?

Influencing the growth of the housing market is now becoming a crucial objective for the Board of Financial Regulators, the subject having already been discussed at its last meeting.

Among the measures that could be implemented to protect the financial system, the Australian Prudential Regulation Authority (APRA), the country’s main banking regulator, could impose a cap on the percentage of the mortgage portfolio that can be directed towards loans. investment-oriented.

In addition, other measures could aim to require a higher cushion from potential borrowers. This rule will aim to reduce the risk of default if interest rates rise.

In addition, interest-only loans, which are considered riskier due to their higher loan-to-value ratio and the potential losses they could cause to banks if house prices fall sharply, can also be limited. insofar as they represent a relatively small percentage. of a lender’s total mortgage portfolio.

How could these macroprudential policies affect house prices?

In a report published in early September this year, CoreLogic, a research firm specializing in the Australian real estate market, pointed out that policy changes could lead to a rapid and sharp correction in house prices in the country, similar to what has happened in the past.

Citing previous rounds of macroprudential policy changes, CoreLogic pointed out that a tightening of credit conditions by the Reserve Bank of Australia (RBA) could lead to lower house prices in subsequent years, especially in cities. which are a common target for investors.

All things considered, a decision by regulators at this point seems prudent given the percentage of loans made to borrowers with high debt-to-income ratios – an indication that the currently favorable conditions are prompting banks to take more risk than they should. lending.

About Alejandro Arrieche PRO INVESTOR

Alejandro is an independent financial analyst with 7 years of industry experience. He writes technical content on economics, finance, investments and real estate and has also helped financial companies develop their digital marketing strategy. His favorite subjects are value investing, macro analysis and technical analysis. Other publications Alejandro has written for include The modest portfolio, and Capital.com.


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