Chapter 10
Housing finance, investor activity and macroprudential policy
10.1
During the inquiry the committee considered the relationship between
housing finance and housing affordability, repayment affordability and
'mortgage stress'. This chapter considers whether Australians are unduly
constrained in accessing housing finance, and the relationship between access
to housing finance and housing affordability. The relationship between
increasing house prices and the incidence of 'mortgage stress' is also examined.
10.2
In addition, this chapter weighs concerns expressed by some witnesses
that excessive borrowing by investors is fuelling a speculative boom in housing
prices, and fostering a build-up of risk in the financial sector more broadly.
These concerns focused in particular on the Sydney and Melbourne housing
markets, and the strong growth in investor activity in those markets. In
considering these concerns, the committee also assessed what role, if any,
macroprudential tools might play in helping to contain excessive speculative activity
by housing investors.
10.3
This chapter also includes some brief observations regarding the impact
of limited recourse borrowing for residential property by Self-Managed
Superannuation Funds (SMSFs).
10.4
During the inquiry, the committee also received evidence suggesting
problems in the availability of finance for affordable housing and urban
regeneration projects. These issues are considered in chapter 23.
Access to finance and the mortgage industry
10.5
The ability of Australians to access housing finance was not a major
focus of this inquiry. Nonetheless, the committee did receive some evidence
suggesting that over-concentration in the housing finance sector might be
limiting the product choices available to some consumers. In particular, the
Mortgage and Finance Association of Australia (MFAA), pointed to the dominance
of the 'Big Four' banks in the housing loan market as an impediment to
innovation in the housing finance sector:
MFAA submits that lack of wide-spread competition across the
housing lending sector is an inhibitor of the development of innovative
mortgage products focussing on new buyers.[1]
10.6
Although not addressing these concerns directly, the RBA told the
committee that it was confident access to finance was not a significant problem
for most homebuyers. Dr Malcolm Edey, Assistant Governor (Financial System),
told the committee that Australians enjoyed good levels of access to housing
finance and that households are:
...not artificially constrained from borrowing as much as they
can reasonably be expected to repay. I have already made the point that
perceptions of affordability will differ across different types of households,
but if there is a perceived affordability problem in Australia it is not due to
a lack of finance.[2]
10.7
The RBA did acknowledge that tighter lending standards generally
prevailed in Australia compared to the situation prior to the Global Financial
Crisis. However, it maintained that these tighter standards were not an
unreasonable constraint on would-be borrowers, but rather a welcome shift to
more sustainable lending practices:
The experience of the United States in the lead-up to the
financial crisis demonstrates that it is not in the long-term interest of
either borrowers or lenders to boost 'affordability' by enabling households to
borrow ever-larger amounts. Lending standards in the Australian mortgage market
were not as loose as those seen in the United States in the years leading up to
the crisis. There were, however, some instances of risky practices in
Australia, which have become less prevalent in recent years. This is a welcome
development and should not be seen as an unwarranted constraint.[3]
Committee view
10.8
On the basis of evidence received, the committee is satisfied that
Australians are not unreasonably impeded in accessing finance to purchase a
home. The committee also notes advice from the RBA that, to the extent mortgage
finance is generally not as easy to access as it might have been prior to the
Global Financial Crisis, this reflects a welcome improvement in lending
standards. This is not to suggest that some Australians do not have difficulty
accessing housing finance. As discussed further in the next chapter, some
groups of people, including low-to-moderate income first home buyers, may have
particular difficulty in accessing housing finance. However, the evidence
received in this inquiry does not appear to suggest that these issues are
symptomatic of systemic failures in the housing finance market.
Owner-occupier mortgages and mortgage stress
10.9
Despite improvements in mortgage lending practices, a number of
witnesses expressed concern that some households are taking on excessive levels
of mortgage debt due to house price growth. While levels of mortgage stress
appear relatively well contained in the current low interest rate environment,
these witnesses cautioned that increasing numbers of households are likely to
be exposed to significant financial difficulty when monetary policy inevitably
tightens.
10.10
Trends in overall repayment affordability, as DSS noted, are largely
governed by changes to household income and interest rates.[4]
In the last two decades interest rates have been relatively low and income
growth relatively strong, which has somewhat benefited repayment affordability.[5]
The RBA told the committee that on the measure of repayment costs on a typical
new housing loan expressed as a ratio of disposable income, affordability had
'fluctuated around a broadly stable average over the past three decades, with
average repayments varying between about 20 and 30 per cent
of disposable incomes'. As Dr Edey explained:
...the ratio of housing prices to incomes now is at the top of
its historical range but over time this has been more than offset by falls in
financing costs, so that the typical repayment burden as a share of income is
currently not particularly high.[6]
10.11
In April 2014, the ABA observed that despite historically low interest
rates for variable and fixed rate home loans, there had been little movement in
the size of the average home loan made by banks to owner-occupiers in the three
years to the end of 2013. It should be noted, however, that the same source
used by the ABA to make this point also showed significant increases in average
mortgage sizes between the mid-1990s and 2009.[7]
10.12
The RBA suggested that while some households would always struggle to
meet their repayment obligations, the available evidence suggested that
mortgage stress was not widespread. Nor was there evidence of systematic
excessive lending beyond what borrowers could afford to repay:
Arrears rates are low and have fallen since their 2011 peak.
Most personal bankruptcies are unrelated to mortgage debt, and they have also
declined in recent years, as have home repossessions. Lenders have been willing
to extend hardship relief to households that face temporary difficulties in
repaying their loans, for example due to the floods in Queensland in late 2010
and early 2011. In addition, many households have built up buffers of excess
repayments through offset and redraw facilities. These buffers provide those
households with a cushion of prepayments that can be drawn down to avoid
falling into arrears. By implication, these households' required mortgage repayments
are affordable given their current financial circumstances.[8]
10.13
In its most recent Financial Stability Review, released on
25 March 2015, the RBA noted that indicators of household financial
stress remain at low levels, with borrowers continuing to take advantage of low
interest rates to pay down debt more quickly than contractually obliged and
build up 'mortgage buffers'.[9]
10.14
However, the RBA also acknowledged that household financial stress could
'start to increase if labour market conditions weaken further than currently
envisaged'.[10]
Moreover, as Dr Edey told the committee, the general stability in repayment
affordability did not mean that particular types of households in particular
markets were not experiencing affordability problems.[11]
Similarly, DSS noted that the 'absolute increase in the size of mortgages, as
opposed to simply the amount that is required to pay off a mortgage, has
significantly increased the level of risk taken on by households entering the
housing market'.[12]
10.15
Some witnesses suggested that the current low interest rate environment
was in fact disguising the extent to which many Australians were exposed to
severe repayment affordability issues. For example, Professor Stilwell
underlined what he regarded as the risks created by households engaging in
excessive borrowing in a low interest rate environment to chase ever-rising
home prices. Such behaviour, he suggested:
...has some awesome historical equivalents, such as the
sub-prime mortgage market collapse in the United States that precipitated the
global financial crash of 2007–8. That was the terrible fallout of a process
that involved people on modest incomes seeking to borrow to buy houses—and
vigorously encouraged by lending institutions to do so—without due regard to
their capacity to service the debt. Where future incomes are unreliable,
especially because of insecure jobs, this can be a disastrous recipe for the
individuals and families caught up in this process, as well as for the
macroeconomic situation more generally.[13]
10.16
The committee also heard from a number of community service and housing
providers who reported growing levels of mortgage stress, particularly in suburbs
on the urban fringe of major cities. For instance, a submission from community
legal centres located in Melbourne's outer-western suburbs referred to high
rates of mortgage stress being experienced in its local communities. Some of
the reasons for this, the centres offered, included 'unscrupulous lenders,
interest rate increases, unemployment, family breakdown, death of a spouse,
illness or injury'. The centre recommended that the Commonwealth fund 'mortgage
stress clinics made up of [community legal centres] and financial counsellors
to assist residents suffering mortgage stress'.[14]
Borrowing by housing investors and potential
macroprudential tools
10.17
As discussed in earlier chapters, a large number of submissions
expressed concerns that highly leveraged housing investors were driving up
house prices and pricing first homebuyers out of the market.
10.18
In response to heightened investor activity in certain housing markets,
the RBA has indicated a degree of concern that housing investors are assuming
too much risk. For example, in early September 2014 Governor Glenn Stevens
noted that a monetary policy stance aimed at encouraging business investment
and generating employment amid global economic weakness also creates increased
risk in the housing market:
As for things that monetary policy should try to avoid, we
are also cognisant of the fact that monetary policy does work initially by
affecting financial risk-taking behaviour. In our efforts to stimulate growth
in the real economy, we don't want to foster too much build-up of risk in the
financial sector, such that people are over-extended. That could leave the
economy exposed to nasty shocks in the future. The more prudent approach is to
try to avoid, so far as we can, that particular boom-bust cycle. It is stating
the obvious that at present, while we may desire to see a faster reduction in
the rate of unemployment, further inflating an already elevated level of
housing prices seems an unwise route to try to achieve that.[15]
10.19
The RBA also told the committee that while it was mainly concerned with
the imbalance in the Sydney and Melbourne markets, it was not confident that
other markets would not suffer in the event of a downturn in those markets:
[W]e would see the imbalance as being primarily in the Sydney
and Melbourne markets. But of course what we do not know is whether the
down-swing will be quite so concentrated. ... [A]t the moment the increase in
house prices is primarily concentrated in those two cities. To be honest in
some other parts of Australia house prices are rising a little bit faster than
incomes but not by a whole lot and not by the kind of growth rates that would
cause you to be too concerned. But it is part of a general cycle in house
prices and we are worried about what the downside of that house price cycle
might look like.[16]
10.20
In late September 2014, with the release of its Financial Stability
Review, the RBA indicated that it was in discussions with the Australian
Prudential Regulation Authority (APRA) regarding the potential use of
macroprudential tools to counter excessive speculative activity by housing
investors, particularly in Sydney and Melbourne (as discussed below). Whereas
traditional prudential policy, often referred to as 'microprudential', focuses
on the safety and soundness of individual financial institutions,
macroprudential policy is concerned with the stability of the financial system
as a whole. To this end, macroprudential policy seeks to use regulatory
instruments, referred to as macroprudential tools, to reduce systemic risks that
can develop in boom-bust financial cycles.[17]
Such tools, as they apply to housing finance, can include loan-to-value limits
(LTV; or, commonly, 'LVR', for 'loan-to-value ratio') and debt-to-income (DTI)
limits.[18]
10.21
Statements in recent years from the RBA have hinted at a general
scepticism regarding the value of macroprudential tools in limiting housing
price growth. For example, a 2013 paper by Dr Luci Ellis, the RBA's Head of
Financial Stability, concluded that LTV and DTI restrictions are generally
insufficient to counteract the price effects of low or falling interest rates.[19]
In July 2014, Dr Ellis stated:
By now it should be clear that the Australian authorities'
views on this supposedly new toolkit are a bit different from those in some
other jurisdictions. We view macro-prudential policy as something to be
subsumed into the broader financial stability framework. We recognise that
quantitative restrictions were already tried in the 1960s and 1970s, and didn't
always work so well.[20]
10.22
In August 2014, Governor Stevens himself referred to 'dreaded macroprudential
tools' as the 'latest fad, internationally' during his appearance before the
House of Representatives Standing Committee on Economics. However, he also
noted that he did not rule out the use of macroprudential tools or asking APRA
to use them, if needed. That possibility, he stated, would 'remain on the
table'.[21]
10.23
While Governor Stevens had at no point ruled out the possibility that
macroprudential tools may be used, the RBA's September 2014 Financial
Stability Review nonetheless suggested a shift in the RBA's thinking on the
subject. The review noted a strong pick-up in growth in lending for investor
housing, particularly relative to growth in lending for owner-occupied housing
and businesses. It stated that with the strong growth in lending for investor
housing:
...the composition of housing and mortgage markets is becoming
unbalanced, with new lending to investors being out of proportion to rental
housing's share of the housing stock. Both construction and lending activity
are increasingly concentrated in Sydney and Melbourne, where prices have also
risen the most.[22]
10.24
The Financial Stability Review also discussed the risks
associated with the strong growth in lending to housing investors, measures
announced by APRA to help manage this risk, and discussions between APRA and
the RBA on further measures that might be considered:
In the first instance, the risks associated with this lending
behaviour are likely to be macroeconomic in nature rather than direct risks to
the stability of financial institutions. Property investors in Australia have
historically been at least as creditworthy as owner-occupiers, and mortgage
lending standards remain firmer than in the years leading up to the financial
crisis. Even so, a broader risk remains that additional speculative demand can
amplify the property price cycle and increase the potential for prices to fall
later, with associated effects on household wealth and spending. These dynamics
can affect households more widely than just those that are currently taking out
loans: the households most affected by the declines in wealth need not
necessarily be those that contributed to heightened activity. Furthermore, the
direct risks to financial institutions would increase if these high rates of
lending growth persist, or increase further. In this environment, recent
measures announced by the Australian Prudential Regulation Authority (APRA)
[through the release of a draft Prudential Practice Guide for housing] should
promote stronger risk management practices by lenders. The Bank is discussing
with APRA, and other members of the Council of Financial Regulators, additional
steps that might be taken to reinforce sound lending practices, particularly
for lending to investors.[23]
10.25
These 'additional steps' were taken by observers to potentially include
the use of macroprudential tools. Comments by Governor Stevens made in
late September 2014 provided further insights into the RBA's evolved
thinking on the potential introduction of macroprudential tools. Asked about
his characterisation in August of macroprudential tools as a 'fad' and whether
his views had changed, Governor Stevens responded:
[I]nvestment finance is growing at double-digit rates. It's
nearly half the flow of new approvals. A lot of this is interest-only lending
in an environment of rising house prices, especially in Sydney and Melbourne. I
think it is perfectly sound and sensible to ask ourselves whether we might at
least lean on that a bit. I see not much downside of doing so. The worst that
could happen is that it doesn't have that big an effect, but if it had some,
and that helps us to square in some small way all the conflicting things that
we have going on, that is worth a try. I'm not naïve enough to believe that
these kind of tools are, you know, any kind of panacea or a permanent solution.
I'm old enough to remember the lessons of regulation in the past. But that
doesn't mean you shouldn't use them for a period, if at the margin they might
be helpful, and that's the kind of thing that's in my mind, nothing more. I
don't think that's any kind of change of tune really. I've always said I have
certain scepticism about macroprudential tools as a panacea, but I remain open
to using them if it seems sensible to do so, and that's the kind of thing we
have in mind right now.[24]
10.26
On 2 October 2014, following the release of its Financial Stability
Review, the RBA appeared before the committee and explained the thinking
underlying the comments in the review:
The rate of growth of investor finance is significantly
outpacing the growth in household incomes. Loans to investors currently account
for close to 50 per cent of new housing loan approvals. Investor
activity has been particularly concentrated in New South Wales and Victoria. In
New South Wales, investor loan approvals have increased by about 90 per cent
over the past two years. It is against this background that the bank said in
its Financial Stability Review last week that the composition of housing
and mortgage market activity is becoming unbalanced. The review also indicated
that we are discussing with APRA steps that might be taken to reinforce sound
lending practices, particularly for investor finance although not necessarily
limited to that.
I emphasise that the banks in Australia are resilient and
mortgage lending in this country has historically been relatively safe. APRA
has, however, noted a trend to riskier lending practices and over the past
couple of years has been seeking to temper these through its supervisory
activities. There are also broader concerns with the macroeconomic risks
associated with excessive speculative activity, since this activity can amplify
the property price cycle and increase risks to households. Our discussions with
APRA and other agencies on these matters are ongoing and there will be more to
say about them in due course.[25]
10.27
Asked about Governor Stevens description in August 2014 of
macroprudential tools as an international 'fad', Dr Edey explained that the
Governor was rightly expressing scepticism (as both he and Dr Ellis had
previously) about 'highly prescriptive and overegineered approaches that are
being advocated in some of the international debate'. Dr Edey emphasised,
however, that the Governor had also stated that the RBA did not rule out the
use of macroprudential tools in Australia.[26]
Dr Edey added:
You have had people talking about setting up entirely new
frameworks where you have new institutional arrangements and new oversight
committees, trying to almost mechanise the relationship between instruments and
objectives in a way that we think is unrealistic. We have talked in very
sceptical terms about those kinds of approaches to policy. That is why I
emphasise the continuity between what we are doing now and what we have said in
the past. What we have always said is that we do not need a radically new
approach in Australia. We have the tools and we have institutional arrangements
that are capable of dealing with systemic risks as they arise. What we believe
has happened over the past year is that a concentration of risk in the housing
market has come up, it has gradually become more severe and, as that has
happened, we have turned up the dial in the response to that, both in our
rhetoric and in the way that we have engaged with APRA as to the sorts of
supervisory responses that are needed.[27]
10.28
However, the RBA also indicated in the same hearing that LVRs were
'unlikely to be in the tool kit' being considered by APRA, as they would be
targeted at the wrong segment of the market. It further indicated that the
tools that were being considered would be directed toward the apparent
imbalance 'in the form of excessive activity by investors in the market'.[28]
10.29
Asked how macroprudential tools would be deployed given the diverse
conditions in housing markets throughout Australia—that is, how such tools
could be used to contain investor activity in Sydney or Melbourne without
adversely affecting flat or depressed housing markets—Dr Edey responded:
I think we do need to be mindful of that issue. That is why I
emphasised earlier that any measures we take have to be well targeted. Exactly
how that is done will become evident in due course when the final decisions are
made. We have to strike a balance between being overly prescriptive and trying
to micro-manage the market and coming up with measures that could be broadly
effective. I would just make the mathematical point that most of the growth in
investor finance at the moment is coming out of lending into the Sydney and Melbourne
market, so any measure that targets investor finance in total is going to have
its major impact there because that is where most of the activity is. Whether
we need to do something even more than that to target it even more tightly is
something we will need to think about. As a general proposition, something that
is targeted at the investor market is going to have its main impact in the
areas where the largest imbalances are at the moment.[29]
10.30
Subsequently, Dr Edey told the committee that the RBA was not hostile to
housing investors, and any tools used would need to be directed specifically to
addressing the 'excessive growth in risk exposure in the investor market':[30]
I think there are a few principles that have to be kept in
mind. One is that it has to be targeted. We have already talked a bit about
what that means: identifying what the problem is and designing measures that
specifically address that problem. It has to be proportionate. We are not
trying to kill the investor market. We are not against investors; we are just
against imbalance, so it has to be proportionate. Yes, I think those are the
two main things really. It has to be well targeted. It has to be commensurate
to the problem that we are facing.[31]
10.31
The committee received evidence from a number of witnesses (all of it
received prior to the release of the September 2014 Financial Stability
Review) arguing that the RBA and APRA should implement (or at least
consider implementing) macroprudential tools to dampen speculative activity in
the housing market. For example, in order to address what it regarded as a
speculative property bubble driven in part by excessive borrowing, Prosper
Australia recommended carefully considered macroprudential regulation to
'restrain our current debt appetite'. Prosper Australia did stress, however,
that the detail of such macroprudential tools would be critical:
The quality of those macroprudential regulations is
everything. It is all very well to announce them and say that you have got
some, but they need to be effective as well.[32]
10.32
Professor Burke, meanwhile, expressed his frustration at the RBA's
apparent unwillingness to countenance macroprudential interventions in the
housing market. According to Professor Burke, while he RBA appeared to be
solely focused on the interest rate, in countries including China, Malaysia and
New Zealand the respective central bank:
...is actually interfering in the lending regimes of finance
institutions to avoid housing bubbles. China, for example, has restricted
finance to new supply. It has said that there will be no funds for investors
who already own more than one dwelling. New Zealand has capped financing by
private finance institutions for home loans at no more than 80 per cent of the
value of the property. They are temporary arrangements that they put in place
at the time of housing bubbles. We do not seem to have any discussion about the
potential for those sorts of levers being used by the Reserve Bank and it
almost looks as if you cannot touch the housing market. That puzzles me somewhat,
that the Reserve Bank does not do that, except for jawboning saying we should
not be investing because it could be risky. That does not seem adequate to me.[33]
10.33
Other countries have in recent years introduced macroprudential measures
directed toward reducing risk in the housing market. Notably, in May 2013 the
Governor of the Reserve Bank of New Zealand (RBNZ) and the New Zealand Minister
for Finance signed a Memorandum of Understanding (MoU) regarding
macroprudential policy and operating guidelines. This MoU covered the application
and operation of macroprudential policy. It provided that the RBNZ could
intervene and apply macroprudential tools where 'significant risks are judged
to be emerging'. The available macroprudential instruments included countercyclical
capital buffers, adjustments to the minimum core funding ratio, sectoral
capital requirements, and restrictions on high LTV ratio residential mortgage
lending.[34]
In response to rising house prices, in August 2013 the RBNZ intervened in
the market by introducing a LTV ratio limit, so that residential mortgage
lending with LTV ratios higher than 80 per cent are capped at
10 per cent of a bank's new residential mortgage lending (subject to
some exemptions).[35]
10.34
In May 2014, the RBNZ conducted a counterfactual analysis of the effect
of the LTV ratio limit on the housing market. It found that six months after
its introduction, the LTV ratio limit appeared to have moderated house price
inflation and credit growth. It also estimated that without the LTV ratio limit,
or any other housing-specific shocks, house price inflation and household
credit growth could have been 3.3 and 0.9 percentage points higher
respectively. The analysis noted, however, that it was undertaken only six
months after the implementation of the LTV ratio limit. As such, the analysis
acknowledged that the findings probably reflected a transitional period, during
which market participants may have reacted quite rapidly to the policy. New market
participants, it added, might grow accustomed to the policy, and housing
activity could consequently rebound leading to smaller effects over the first
year.[36]
10.35
Other countries that have also introduced macroprudential tools in
recent years in response to house price inflation include Canada in 2008, and
South Korea at various points between 2002 and 2010.[37]
10.36
The RDC argued that while macroprudential tools could be used to manage
systemic risk, they were only effective if the nature of the risk was properly
understood. The RDC suggested that in New Zealand, decisions about
macroprudential tools had been taken in the absence of adequate data on the
levels of housing investment, and in particular foreign investment. As such,
housing prices had continued to rise, and the macroprudential tools deployed
had simply served to slow growth in the first homebuyer market:
The point is that, if we are to make those decisions, we need
to do that not in the absence of the data that understands where we are heading
in terms of the investment patterns, the supply that is coming through, the
demand that is likely to be there and the foreign investment numbers. Those
inputs into the equation need to be there if we are going to implement some of
those macroprudential tools.[38]
10.37
For its part, Home Loan Experts complained that current LVR limits were
already too restrictive, and cautioned again moves to tighten the limits
further:
Currently APRA has placed significant policy constraints on
the banks. If they are required to reduce maximum LVRs (Loan to Value Ratio)
similar to New Zealand, this will make it harder for first home buyers to enter
the market since most tend to borrow around 90% of the property value. Limiting
the LVR to 80% would require buyers to save up double the amount of deposit to
make a purchase.[39]
10.38
In contrast, Mr Cameron Murray argued in favour of New Zealand-style LVR
limits, in order to reduce the effect of high-risk investors on the housing
price cycle.[40]
Recent
developments regarding prudential policy and housing finance
10.39
In December 2014, APRA announced new measures to reinforce sound house
lending practices following discussions with member agencies of the Council of
Financial Regulators (CFR; including the RBA, which chairs the CFR). As the RBA
explained, the measures:
...outline prudential expectations of ADIs' [Authorised
Deposit-taking Institutions] lending behaviour regarding: the extent of
higher-risk mortgage lending; the pace of growth in investor housing lending;
and the interest rate buffers and floors used in loan serviceability
assessments. The benchmarks specified are not intended to be hard limits, but
rather to serve as a trigger for more intense supervisory action, potentially
including additional capital requirements.[41]
10.40
In an appearance before the House of Representatives Standing Committee
on Economics on 20 March 2015, the Chairman of APRA,
Mr Wayne Byres, discussed the 'triggers' for intensified supervisory
action by APRA, and the kind of actions the regulator might take to curb the
growth of lending to property investors. Mr Byres indicated that APRA was
considering an increase in capital levels for particular banks whose growth in
lending to investors continued to exceed 10 per cent:
In this current exercise, we are going through, we are
targeting those ADIs that are pursuing the most aggressive lending strategies
and, to the extent there are additional capital requirements imposed, they will
be imposed on those housing portfolios where the risks are and not on the other
lending books that banks have.[42]
10.41
As some have observed, this would likely be achieved through a lifting
of the prudential capital ratio, which APRA sets according to the risks for
each institution.[43]
However, such moves would not be publicly disclosed. Mr Byres suggested that
such 'below the radar' prudential regulation was important in maintaining
public confidence in the banks.[44]
10.42
Meanwhile, the Australian Securities and Investments Commission (ASIC;
also a member of CFR) announced in December 2014 that it would conduct a review
of interest-only housing lending. The review has been prompted by concerns by
regulators about higher-risk lending following strong house price growth in
Sydney and Melbourne. Interest-only loans, ASIC noted in announcing the review,
have reached a new high of 42.5 per cent of new housing loan
approvals in the September 2014 quarter (including loans for both
owner-occupied and investment housing). ASIC Deputy Chairman Peter Kell stated
that while 'house prices have been experiencing growth in many parts of
Australia, it remains critical that lenders are not putting consumers into
unsuitable loans that could see them end up with unsustainable levels of debt'.[45]
10.43
In its most recent Financial Stability Review, released on 25
March 2015, the RBA explained that the recent steps by APRA and ASIC were
directed at managing increased risks associated with the recent run-up in
housing prices and increased housing investor activity:
In this environment of low interest rates and strong demand,
it is important that lending standards do not decline, and the measures
announced by the Australian Prudential Regulation Authority and the Australian
Securities and Investments Commission in December are designed with that
intent. While it is too early to see the effects of these measures in overall
housing lending activity, the authorities will be monitoring an array of
information in the period ahead to help ensure that the current risk profile in
the mortgage market does not deteriorate.[46]
Committee view
10.44
The committee notes and shares the concerns expressed by the RBA
regarding what may be excessive levels of investor activity in the Sydney and
Melbourne housing markets. As the RBA explained, it would appear that lending
to investors has recently been growing out of proportion to rental housing's
share of the market in the two capitals, and this imbalance is inflating house
prices and fostering a build-up of risk in the financial sector more broadly.
10.45
While the risks inherent in this situation are of concern, the committee
would have serious reservations about the use of any overly blunt
macroprudential regulations, including the use of LTV ratios such as these recently
deployed in New Zealand. Throughout the inquiry, witnesses emphasised that
there is not one Australian housing market, but rather many Australian housing
markets, and indeed markets within markets. As such, the committee welcomes
advice from the RBA that it is unlikely anything other than carefully targeted
macroprudential tools would be deployed in Australia, and APRA would be quite
unlikely to consider broad New Zealand-style LVR limits.
Limited recourse borrowing for property by SMSFs
10.46
Some observers have suggested investment in housing by SMSFs, including
through the use of limited recourse borrowing, may be partially responsible for
recent increases in house prices.
10.47
The Association of Superannuation Funds of Australia (ASFA) noted in its
submission that the number of properties purchased by SMSFs in 2011–12 was
possibly as low as 3000 out of a total 360,000 to 400,000 residential property
sales that year. Moreover, the exposure of assets in SMSFs financed by limited
recourse borrowings as at June 2012 was not particularly large at $2.26 billion,
at least relative to overall SMSF assets of $438 billion (nor would all of
this borrowing be for residential property). Nonetheless, ASFA noted that the
amount of limited recourse borrowing by SMSFs was growing rapidly, from
$665 million in June 2010. ASFA further observed that
these figures were based on ATO data available as of June 2012, and that since
that time 'there appears to have been an increase in the activity of
"property spruikers" strongly pushing residential real estate
purchases by SMSFs'.[47]
10.48
The committee also notes that in its September 2013 Financial
Stability Review, the RBA suggested that the growth in property investments by
SMSFs 'is a new source of demand that could potentially exacerbate property
price cycles'.[48]
Committee view
10.49
The purchase of residential property by SMSFs, including through limited
recourse borrowing, was not a major focus of the committee's inquiry. As such,
the committee is not in a position to assess the effect on housing
affordability of property investment by SMSFs, including investments funded by
limited recourse borrowing. Still, the committee believes this issue justifies
close and ongoing observation, not least because of anecdotal evidence of
increasing activity by 'property spruikers' pushing real estate investments by
SMSFs.
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