As housing momentum expected to heat up, time for APRA buy-in?

  • By Christine St Anne

Could macroprudential policies be on the cards with momentum in housing is expected to grow as the Reserve Bank cut rates to a new low. 

On Tuesday the RBA cut rates by 0.15 per cent today, slashing official rates to 0.10 per cent.

The central has also announced a range of other measures including buying $100 billion in government bonds and reducing the cost of funding.

The RBA’s decision to cut rates is primarily focused on stimulating business investment, jobs growth and household consumption. 

With this in mind, CoreLogic head of research Tim Lawless said that the central bank is likely to look through the ‘noise’ of higher housing prices. 

CoreLogic data has already revealed that house prices are already rising around most areas of the country while latest industry data has revealed a pickup in new lending

Speaking at a press conference on Tuesday, RBA governor Philip Lowe said he was not as worried about the impact of low rates on the housing market as he was in the past. 

Currently he sees low population growth and high vacancy rates discouraging investors from entering the market as factors dampening the demand for housing. 

Nevertheless, he acknowledged that asset prices could rise, and it is an area he will be watching. 

For now, his main “worry was people not having the jobs they deserve.”.

For Lawless, however, there is a good chance lower rates could see momentum building across the nation’s most valuable asset class,” 

Similarly Betashares chief economist David Bassanese believes that rate cut could lead to a housing bubble, adding that the RBA’s “bold new approach will be on asset prices – as the virtual guarantee of persistent low interest rates will push up valuations as investors chase yield and greater leverage”. 

While the RBA focuses on jobs, APRA may have the headache of managing a heated housing market. 

Here both Lawless and Bassanese see scope for macroprudential policies. 

There’s bubbles in the house 

“If housing market conditions generate too much risk through rising prices, particularly in the lending space, policy makers might consider other mechanism that will allow interest rates to stimulate the economy, but keep a lid on house price appreciation,” Lawless said.

The prudential regulator has previously stepped in to curtail lending to segments such as investors loans and Lawless sees scope for similar macroprudential policies. 

Lawless believes that macroprudential initiatives have proven to be a rapid and effective means of quelling housing market exuberance via credit policies.  

“The previous macroprudential policies were largely aimed at investor activity and interest only lending, both of which remain at modest levels at the moment.

“Considering household debt levels remain close to record highs, any intervention from a macroprudential perspective would likely be focussed around hard limits on debt to income ratios or loan to valuation ratios.” 

For Bassanese, there could easily be a return to macro-prudential controls if current low rates cause a return of speculative borrowing to chase property or shares as the economy recovers.  
“The RBA appears caught between a rock and hard place, as its own very low interest rate policy is what may well cause this speculative activity in the first place,” Bassanese said. 
He acknowledged that the RBA would not want to let poor lending standards return, but it’s interest rate policy will be directly encouraging it. 
“It may well be like turning on the fire hydrant, but then trying to only let some people drink from it.”