The strength of Australia’s residential property market and the possible risks it poses to the economy have come under the spotlight from the Reserve Bank and the media in recent months.
The Reserve Bank has expressed concern in various speeches and reports on the strength of housing markets in Sydney and Melbourne. Indeed, data from RP Data-Rismark released this week highlighted that Sydney dwelling price growth has been particularly strong, rising by 14.3% rise over the past year, while Melbourne prices have grown by 8.1% over the past year. Elsewhere, prices have been tracking at more subdued levels, though Brisbane shows signs of firming.
The RBA sees signs the market is becoming “unbalanced”, as recent housing price growth seems to have encouraged even more investor activity. The most recent ABS housing loan approvals data show investors now account for around 40% of all new loans, with rental housing’s share of the housing stock sitting at around 25%. The RBA’s own credit data shows lending to dwelling investors rose by 9.1% over the past year, outpacing lending to owner-occupiers, which rose by 5%, and lending to business, which rose by 3.2%.
It is important to note the RBA’s concern around the housing market is centred on the effects on household balance sheets. They are not concerned about the health of Australia’s banking sector, or worried about the current level of construction of new homes. Specifically, the RBA is worried that speculative demand from property investors will “amplify” the price cycle, or lead to stronger price growth now that will “increase the potential for prices to fall later, with associated effects on household wealth and spending.”
If house prices did fall, the RBA is concerned that property owners, who would see declines in their wealth from falling house prices, would respond by cutting household spending and leading to broader weakness across the economy. Indeed, house price falls would affect all property owners, be they investors and owner-occupiers, and not just those who contributed to the heightened activity.
In the past, the RBA would have responded to strong house price growth by raising interest rates, but they are reluctant to do so in the current environment as demand across the broader economy is soft. They are also keen for new homes to continue to be built, seeing construction of new dwellings – or a supply response as they call it – as a necessary and important dynamic needed to rebalance the housing market and cool prices.
The historically low cash rate, at 2.5%, is supporting the current pick-up underway in dwelling investment. ABS data this week showed the number of building approvals for dwellings rose by 6.8% over the year to August (in trend terms). Growth has been especially strong in approvals for apartments, units, townhouses, etc.), which rose by 3.1% m/m (but only 0.8% p.a.) in August.
So given an environment where the RBA would like activity to strengthen in the broader economy and residential property construction to continue, it is set to keep interest rates on hold for the foreseeable future. Instead, they are in discussion with APRA, the banking regulator, to explore how it may be possible to temper the amount of credit available for investors, to cool the market. The indications from the RBA are they will avoid restricting the ability for first home buyers to borrow, while they are keen for banks to increase their lending to business.
Read more about this subject and other recent data and economic developments in this week’s Ai Group Economics Weekly Update.