PAUL BLOXHAM | 16 OCTOBER 2015
Today’s RBA semi-annual financial stability review focused on increasing risks in Australia’s property market.
On housing, the RBA noted some tentative signs that market activity was pulling back in Sydney and Melbourne, from rapid rates of growth, which is positive. At the same time, they suggested that recent lending standards had been weaker than had been previously thought and that the Melbourne and Brisbane apartment markets look to be over-supplied.
On commercial property, they re-iterated concerns that prices are rising much faster than rents. In our view, a further RBA rate cut, as the market is pricing, seems unlikely in an environment of already ‘frothy’ property markets.
The RBA noted that ‘recent investigations by regulators had revealed that housing lending standards in recent years have been somewhat weaker than had originally been thought’.
They noted that ‘while the housing market remains a long way from oversupply nationwide, some geographic areas appear to be reaching that point, particularly inner-city areas of Melbourne and Brisbane’.
They noted that ‘many existing borrowers also continue … to pay down their mortgages faster than required’ and that ‘aggregate mortgage buffers remain around 16% of outstanding loan balances, equivalent to more than two years of scheduled repayments’.
They noted that ‘risks are rising in the commercial property sector’ with ‘oversupply evident in the Perth and Brisbane office markets’.
The property market has been a keen focus of RBA observers recently. Some are arguing that the signs of slowdown in housing price growth and construction may mean the RBA needs to cut interest rates further to maintain growth momentum in the economy. In contrast, we still see the RBA as more worried about excessive property market exuberance than the modest pullback we have seen recently.
Today’s semi-annual financial stability review sheds some light on the RBA’s own view of the property market situation. First, they note that, although there are some ‘tentative’ signs of some slowing in the Sydney and Melbourne housing markets, demand remains strong in these markets (prices are still rising at 17% and 14% annually). Second, they noted that the upswing in housing construction is starting to lead to pockets of oversupply of housing, in the Melbourne and Brisbane apartment markets, although they suggested that the nationwide housing market is a long way from oversupply.
Finally, they suggested that although lending standards have been tightening, as the prudential regulator has been turning up the dial on its micro-prudential settings, it appears that the starting point was that lending standards were looser than had been previously thought.
In our view, the RBA still seems more concerned about making sure that financial conditions and lending standards are tighter in the housing market, rather than being concerned about needing to deliver more stimulus.
In this regard, the recent increase in effective mortgage rates (as a result of a lift in mortgage rates by a major bank), partly in response to the authority’s requirement that banks hold more capital, may not be as much of a surprise to the central bank as the market has been suggesting.
Keep in mind that, for some time, the RBA’s challenge has been that it wanted to maintain loose financial conditions to support the rebalancing of growth, but has been increasingly worried that very low interest rates could over-inflate parts of the housing market. A modest lift in effective mortgage rates, combined with continued low business lending rates and a lower AUD may, in fact, be closer to the ideal policy setting at the moment.
On commercial property, the RBA noted increasing concerns about the gap that is opening up between prices and rents. Much like in housing, the risk that is building up appears to be geographically concentrated. In particular, the central bank noted that oversupply is evident in the Perth and Brisbane office markets. Office vacancy rates are rising to quite high levels in these cities and these are the areas most exposed to the mining downturn. In contrast, vacancy rates are lower in Sydney and falling in Melbourne.
Overall, the RBA stated that the Australian banking system faces ‘heightened, but manageable, risk’ but it is clear that having interest rates at low levels for a long time may be starting to create some unwanted problems.