Sydney Pead: It’s the bubble that never seems to burst. The latest data shows Australian property is now more expensive than ever. And soaring mortgage debt has the financial regulator hitting the brakes on risky lending. Today, ABC’s chief business correspondent Ian Verrender on why APRA is targeting property investors and whether it could finally offer some relief for house hunters. I’m Sydney Pead. On Gadigal land, Sydney, this is ABC News Daily.
Sydney Pead: Ian, it seems every month we’re talking about how expensive housing has become. And surprise, surprise, the latest property data shows values are up again across the board.
News report: House prices have continued to climb higher across the country, but the pace of growth is easing.
News report: Nationally, prices rose 1% in November and 7.5% over the year. The median home value is more than $880,000.
Ian Verrender: Well, Sydney, what can I say? Housing prices just continue to climb across the country, but the pace of growth is starting to ease slightly. Well, at least in Sydney and Melbourne. Cotality, that’s the company that measures these things, their monthly home value index, that increased by 1% nationally in November. And that’s a pretty strong gain. You know, you multiply that by 12, you got a fairly strong annual gain. And that was the third month in a row where values had risen by more than 1%. Now, the Sydney market is quite subdued compared to the overall national market and Melbourne as well.
Sydney Pead: Okay, so we’re seeing Sydney up more than 5% over the past year, Melbourne up 4%, Brisbane’s a huge 12.8%, which is just wild. So a lot of people still have lots of money to be buying houses, I suppose, either as a roof over their head or as an investment, right?
Ian Verrender: Yeah, I guess the moderation in the Sydney market could reflect affordability constraints. I mean, there’s only so much money you can borrow and so much money you can spend. Part of that dynamic involves people looking elsewhere. So if you can’t afford to buy in Sydney, well, maybe you’re going to look to Brisbane, maybe you’ll look to Perth and Adelaide, you know, the markets that have lagged for quite a few years behind Sydney and Melbourne, and Sydney and Melbourne now hit those upper limits, you look elsewhere.
Sydney Pead: Okay, so let’s look at the outlook for property then. Do you think affordability is going to keep getting worse?
Ian Verrender: Yeah, I think so.
Sydney Pead: I was worried you’d say that.
Ian Verrender: Well, it’s funny, you know, like the Reserve Bank cut interest rates three times this year. And each time they did that, that makes affordability a little better, because your repayments drop. Now, that’s fine, if you’re already a homeowner, and you’re, you know, you suddenly you’ve got a smaller debt to, you know, servicing commitment each month. But if you were out there looking to buy a place, what’s the first thing you’re going to think of? Interest rates have gone down, I can borrow a bit more. And you’re not the only one doing it, everyone else is thinking exactly the same way as well. And if everybody goes out there and borrows an extra 50 grand, you know, more than they’d originally anticipated, then house prices and unit prices are going to get bid up by that extra amount. So the affordability improvement that you see evaporates pretty quickly.
Sydney Pead: So interest rates have a big effect on the housing market. And economists now expect the RBA to keep rates on hold or maybe even hike them next year. Let’s talk about the data that sways that decision. There’s inflation, the CPI, what other factors could affect interest rates and property prices over the next year?
Ian Verrender: Well, the Reserve Bank’s got two mandates. One is inflation, and the other one is employment. We saw a big breakout in inflation just in the past few weeks. But there are some one-off factors that are involved in that, primarily the rebates, the power rebates, the electricity rebates that have come off. So we don’t know exactly how much impact that’s going to have now that that’s baked into the system. Inflation might moderate somewhat, but it does seem as though the economy is gathering a bit of pace. And part of that is because property prices are going up and people feel more confident.
Sydney Pead: I guess the other part of that is the policy choices around it. Labor’s 5% home loan deposit scheme is rolling out now. What kind of effect is that having on house prices?
Ian Verrender: Whenever you come up with a scheme to try and help people to get into the housing market, you’re boosting demand for housing. And guess what that does? It pushes up the price. It does improve it for the people who are in there quickly, first up, but then it quickly becomes a subsidy for the sellers, not for the buyers, because what it does is it pushes up the price. And if you’re in that lower end of the market, which is where most first home buyers are, obviously, if you’ve got a property there, then you’re the beneficiary because you’re selling into a much stronger market.
Sydney Pead: So houses cost more than they ever have, and people are still buying them, which means banks are lending more than they ever have. And that’s pretty big business for them, right? But it also means we’re in a lot of debt.
Ian Verrender: Oh, yeah, absolutely. I mean, look, higher prices require more debt. And the banks are in the business of lending money. So more debt is great business for them. So bigger loans deliver bigger bank profits. The Australian real estate market that’s worth $11.6 trillion. A lot of that is underpinned by debt. We’ve got mortgages at close to $2.6 trillion. Now, you might think, well, that’s a lot less than the value of the houses. But all that debt is generally concentrated at the end of the market where, you know, you’ve got younger people who’ve only bought houses in the past five to 10 years. They’ve paid an enormous amount of money, and they’re really suffering under that debt burden. So, you know, it represents far and away the biggest component of our four big banks lending portfolios.
Sydney Pead: The debt generated through those mortgages is just enormous. So now the banking regulator, APRA, is stepping in. So tell me what APRA is doing.
Ian Verrender: Look, APRA isn’t so much concerned about housing affordability. It’s concerned mostly with the stability of the banking system. So if you get a situation where you’ve got a lot of people just barely managing to scrape up enough money to pay their mortgage every month, or every fortnight, and there’s an event that takes place where you get a big spike in unemployment, and therefore people cannot pay their mortgage, that might be a threat to the banking system. So their goal is to ensure that they can engineer a situation where they put the brakes on lending and particularly risky lending. Now, what they announced just in the last week is that they are going to limit lending to people who have what’s known as high debt to income ratio. So let’s say you earn $100,000 a year. Now under these rules, anyone trying to borrow more than six times their income, so if you earn 100 grand, and if you’re trying to borrow 600, you’re considered to be a fairly risky borrower. And so it’s not going to be banned, but the banks will be restricted in how many of those loans they can hand out. The level they’ve settled on is about 20% of their mortgage book. And that 20% is going to be split between owner occupiers and investors. Now, as it turns out, investors are the ones who generally take out more debt, because generally they already own a house, they’re probably paying a mortgage on that one as well. So they’re borrowing this extra money to buy another property. So they tend to be fairly highly geared. And so ultimately, these new restrictions when they come in will hit investors harder than homeowners. And the thinking is that if we can slow down the rate of investors in the market, we can still maintain a healthy property market without engineering a crash, but we won’t see those incredible gains and possibly even engineer some slight price declines.
Sydney Pead: Well, those new rules come in on February 1st, and the APRA Chair, John Lonsdale, he says the regulator’s trying to pre-empt any risk to the banks that a booming housing market might cause.
John Lonsdale, APRA Chair: There are some early signs of some risks that we’re worrying about, and that’s particularly on what we call high debt to income lending. And so what we’re doing today, what we’ve announced today is that we will introduce a new tool that targets this particular risk. So not wholesale investor lending, but a particular risk for high debt to income lending for both owner occupiers and investors.
Sydney Pead: But Ian, it doesn’t sound like it will affect all that many people. Will it work to take some heat out of the market?
Ian Verrender: Probably not immediately, no. I think it’s a softly, softly approach. They’ve looked at the market and thought, this can’t go on. And what do we do? They’re generally just trying to de-escalate some of the investor lending that’s taking place because investor lending is growing at an enormous clip at the moment. I mean, investors now make up around about 40% of all new home loans. And of course, a lot of that money is actually going into bidding for existing homes and against people who want to live in those homes.
Sydney Pead: I guess some observers might have liked the regulator to go a bit harder to try and take some more heat out of the market, which it has done before. Right. What kind of impact did that have? And could they do it again?
Ian Verrender: Look, APRA doesn’t act alone. Just a bit of an aside here. They don’t have to act alone in this. They’re part of what’s known as the Council of Financial Regulators. So there’s APRA, which is the Australian Prudential Regulatory Authority. There’s ASIC, that’s the corporate regulator, Treasury and the Reserve Bank. So the four of them are part of this Council of Financial Regulation. And that council is designed to ensure that when things and speed limits like this are imposed, that it’s not going to somehow have some undesired effect. Now, I don’t think this is going to really impact prices immediately. But if we did get a big spike in risky loans and we did see the economy start to take a backward step with a spike in unemployment, you could end up with a property downturn that could turn quite nasty. Now, you mentioned previous times that APRA have waded into the market. The first time they did it was 2014. And APRA imposed some limits on lending back then, but they didn’t really police it. It wasn’t a hard and fast limit to how much the banks could lend. Property market kept going up and up and up. And it got to 2017 and they decided they had to get serious because there was just too much lending, a lot of competition out there from the banks and basically handing money out to people who really couldn’t afford to repay it. So what they did was that they imposed restrictions on the number of interest only loans. And interest only loans are the ones that are favoured by investors because that’s where you get your maximum tax benefit from. And that really worked. It took a lot of heat out of the market. I think over the course of the next two years, from 2017 to 2019-20, you had basically prices come off eight and a half to 10 percent quite slowly, quite measured. It was well done. Unfortunately, that was all just thrown out the window when COVID hit and the Reserve Bank decided to cut interest rates to zero and then was basically imploring anybody who had any kind of cash or any inclination to go and borrow money and buy a house.
Sydney Pead: Well, let’s look now about what this all really means for us. So APRA is tinkering with lending rules. There could be an interest rate rise ahead. But Ian, the bottom line is that housing affordability really has never been worse in Australia. Lots of people call it a housing bubble. Over the years, we’ve heard that a lot. But it just never really pops in any big way, does it?
Ian Verrender: Look, I think there is a change in sentiment within the electorate. If you’ve got kids who are looking to buy their own place and you see the prices, the only way they can do it is if parents give them the money or they wait for an inheritance. And what that then does is it splits society down the middle. So the only people who can ever have any chance of being homeowners are people who’ve been born into families that own a home. And that can have a really debilitating impact on society. You’re creating a class system there. There’s a lot of parents out there now who think, you know, probably for the past 25, 30 years have been thinking, wow, look at the price of my house. It’s gone through the roof. Aren’t I lucky? Who are now looking at it going, I’m going to have to stump up the cash to hand out to my kids and they can’t afford to buy a place. This is not fair. The winds of change are blowing through the economy and through society, and I think, you know, ultimately we probably will see some kind of winding back of some of those tax incentives that really favour investors over owner occupiers.
Sydney Pead: Ian Verrender is the ABC’s chief business correspondent. Audio production for this episode by Sam Dunn. Our supervising producer is David Coady. I’m Sydney Pead. ABC News Daily will be back again tomorrow. Thanks for listening.
