The Reserve Bank of Australia ramped up its rhetoric about the housing market this week and flagged the likely introduction of targeted macroprudential measures.
"The composition of housing and mortgage markets is becoming unbalanced."
The RBA’s semi-annual Financial Stability Review noted that “the composition of housing and mortgage markets is becoming unbalanced”, citing several factors consistent with rising speculative activity.
Concerns are primarily about the growth in investor housing activity and its role in stoking house prices, particularly in Sydney and Melbourne.
On Thursday, Governor Stevens said that it was “perfectly sensible to ask ourselves whether there are tools that might at least lean on that a bit” and that “[t]he worst that could happen is that it doesn’t have that big of an effect”.
While the heightened rhetoric from the RBA on housing could help to cool pockets of the housing market, the central bank now seems closer to introducing macroprudential measures.
The RBA ramped up ‘jawboning’ a decade ago when housing market activity was red hot and RBA commentary since then suggests they think it worked fairly well.
While higher rates would almost certainly cool the housing market, the still uncertain economic outlook means that the RBA still views current rate settings as appropriate for the economy overall and rate hikes appear some way off (ANZ Research thinks mid-2015, but markets thinks later).
The FSR noted that the RBA is liaising closely with other regulators about additional measures that might be taken to reinforce sound lending practices, particularly for investors.
The form of such measures is not clear, but the RBA has previously shied away from prescriptive tools such as caps on loan-to-valuation ratios.
A focus on emphasising appropriate interest rate buffers and other debt-servicing criteria in banks’ loan approval processes has been raised several times.
Regulators are also likely targeting investor housing loans in their ‘on the ground’ presence at the banks. APRA could also increase capital requirements on banks’ investor loans.
The timing of any new measures is uncertain. But Stevens noted that if such measures “helped us to square in some small way all the conflicting things that we have going on, that is worth a try”, suggesting that a near-term implementation looks increasingly likely.