They conjure images of one of Marge Simpson’s favourite magazines “Better Homes than Yours”, but if the public is obsessed, politicians too are obsessed by housing.
As are all Australia’s financial regulators, the Reserve Bank, the Australian Prudential Supervision Authority and the Australian Securities and Investments Commission.
Those three, together with the Federal Treasury, form the Council of Financial Regulators, a joint body strengthened during the financial crisis and instrumental in the response. And COFR too has recently concentrated its attention on housing.
Twenty five years ago, Australia’s gross domestic was $A757 billion. Housing lending was $A93 billion – around 12 per cent of GDP. Today, GDP is $A1.67 trillion and housing lending $A1.65 trillion – 98 per cent of GDP.
Meanwhile, the percentage of housing lending attributable to investors has risen from 20 per cent to more than 50 per cent. (Although definitions differ but while the numbers may vary the trend is clear.)
In 1992 Australian mortgages made up 18 per cent of the Australian major bank lending – it is now 54 per cent. Interest only loans – where no principle is paid down and considered the most risk loan type – constitute around 40 per cent of new lending.
But housing is a Gordian knot of complexity and there’s no Alexander the Great to simply untangle it with one swing of a sword.
Politicians want affordable housing for first home buyers and those swinging voters in the mortgage belt. Investors want somewhere to grow their cash when interest rates are historically low. The economy is relying on housing growth as business growth remains limp. And banks need mortgages for earnings growth.
There are multiple levers but no one policy lever or even simple mix addresses all the needs and indeed there are inherent contradictions. For example, the International Monetary Fund recently released research demonstrating the relationship between low interest rates, high house prices and household indebtedness – pre-conditions for a financial system problem.
The RBA explicitly referred to this challenge when announcing no move in its official interest rate on Tuesday: the bank said “by reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness”.
In Australia, while raising interest rates may tamp down some property lending and offer investors relatively more attractive alternative investments, higher rates may also choke off broader economic growth – in turn affecting salaries, employment and business investment.
Consider the measures being considered to address affordability and stability: changes to negative gearing; capital gains tax; allowing early access to superannuation for first home buyers; changes to grant systems; prudential measures to reign in investment and higher risk lending.
Last week APRA released another slate of measures intended to cool the property market. On Monday ASIC released its own warning to lending institutions to be aware of their responsible lending obligations at a time when new rates are being introduced into different sectors of the mortgage market.
To help stability, APRA wants to limit growth in the historically more-risky sector of interest-only investing (and also investor lending although historically that has actually been lower risk).
It has done this by telling banks to limit growth directly and also flagging higher capital to be held against categories of loans to offset the greater risk – which in turn should make those loans more expensive and slow growth. Indeed the banks have already begun to move ahead of more direct action and increased the interest rates on investor and interest-only loans.
These moves followed two major speeches by RBA officials flagging action to address the heat in the housing sector.
The make-up of the housing challenge is complex, with multiple moving parts and policy issues, but the scale of the sector demonstrates why what is happening in the mortgage market is more than just a side dish at a Sydney dinner party.
The political and social challenge of housing is not just to reduce its importance to the economy (particularly when there few other sources like a resource investment boom) but to balance competing winners and losers.
Consider some of the often conflicting policy signals:
• The government wants higher housing affordability but if the measure to address this is to make lending more expensive for investors, one outcome will be higher margins for banks – not necessarily politically desirable.
• The RBA wants stability in the economy so needs to balance taking heat out of the housing market without too much collateral damage to other sectors. If, for example, household interest payments rise already soft retail spending may fall further.
Greater housing supply is also one way to cool the market but, if there is uncertainty in the market, construction is likely to be held back until there is more certainty.