The New Interest: Macroprudential Guidelines for Property Lending
On the first Tuesday of every month financial markets wait with bated breath for the Reserve Bank of Australia’s (RBA) announcement to any changes in the overnight cash rate (a part of monetary policy). March’s “first Tuesday” surprised pundits, with the RBA by rejecting pressure to reduce the interest rate by 25 basis points, and instead keeping it steady at 2.25%.
Post the mining boom, the economy is struggling. Worryingly, the unemployment rate is rising, the Australian Dollar is stubbornly strong, and inflation is mute. These are all the usual indicators for the RBA to cut, and the accompanying press release explained their reasoning. Whilst acknowledging the possibility of another rate cut, they also voiced concern over Sydney house prices. They added that they are “working with other regulators” to try and contain the growing risks in the housing market.
What does this mean?
By design, low interest rates help stimulate an economy by reducing the costs of borrowing, which in turn leads to increased investment and consumption (economic activity). However, “cheap money” also puts pressure on house prices. With demand exceeding supply, the result pushes prices higher, eventually creating a bubble. What the RBA is concerned with, is what happens when interest rates eventually start to turn higher.
Enter macroprudential guidelines…
With interest rates at record lows globally, this scenario is not unique to Australia. New Zealand and other European countries have had to consider other measures to curb reckless lending. They have introduced what is called macroprudential guidelines as a policy making tool.
Macroprudential guidelines are used to address systemic risks that can develop through good economic times and bad. They are tougher rules on lending, which can be permanent or temporary.
Macroprudential examples can include requiring lenders to;
They can also include other measures such as cracking down on illegal foreign housing investment (something the Australian Government announced after the RBA meeting).
In New Zealand, the RBNZ chose to use an LVR limit of 80%. They argued that borrowers with LVRs of more than 80% are often stretching their financial resources, and are more vulnerable to economic or financial shocks.
There’s been growing debate in Australia over the last year as to whether our property lending needs greater oversight. In December the bank regulator APRA (Australian Prudential Regulation Authority) dipped their toe in the water. They warned that loan growth of more than 10% would be a “key risk indicator” and draw their supervisory attention. In the following month, most lenders curbed loan growth to around this level.
What stopped the RBA from cutting interest rates this month was the activity in the Sydney housing market.
The February CoreLogic RP Data House index showed a 13.7% growth rate for Sydney houses, lifting the median price to $680,000. Corresponding auction clearance rates illustrate the fervor in the Sydney (86.2%) and Melbourne (75.8%) markets. Sydney is the 7th most expensive city in the world according to a Knight Frank survey.
The RBA needs to make Australia more competitive by lowering interest rates (& by default weaken the currency) in order to curb unemployment. APRA has to be careful not to restrict lending so much that it impacts the housing market in weaker states, or causes a sharp drop in house prices. Both need to be mindful the housing problem is predominantly a Sydney one and the rest of the economy is weak.
It is a delicate balancing act.
