‘All the signs of a bubble are there’: Murray

In an interview with Peter Switzer on Sky News earlier this month, former CBA CEO David Murray, who led the Financial System Inquiry, said the Australian economy is vulnerable because “there is a bubble in the housing market”, which he likened to ‘Tulip mania’.

“All the signs of a bubble are there. Many of the signs are the same as the Dutch tulips – people’s behaviours, people’s defensiveness about any correction in the market. If the economy tracks okay it might turn out that this thing sorts itself out. But when those risks are there something needs to be done about it in a regulatory sense. The RBA and APRA need to stay on it,” Mr Murray said.

A number of economists believe the banks could come under greater regulatory pressure to further reign in investor lending, which Mr Murray believes is the real driver behind the current housing bubble.

“When we get a momentum in a market like this, when we get these self-amplifying price spirals that go on longer than expected, it’s another sign that it’s not very healthy,” he said.

“We have more investors in the market than we have had historically. Those investors, even the ones on lower incomes, own multiple properties that are often cross-collateralised and they are the people who become forced sellers. That’s the risk to the system.”

Mr Murray said that historically when the housing market has experienced stress, such as in the early 1990s when interest rates skyrocketed beyond 13 per cent, owner-occupiers “tend to work very hard to hold their properties”. However, owner-occupiers are not the issue this time around, he said. “This time it's the investors in the market that are the problem.”

Asked whether a selloff by investors would create an opportunity for first home buyers to enter the market, Mr Murray outlines the broader implications of a market correction on households. 

“If home prices fall noticeably, there is a wealth effect on the economy and constraint on consumption and that doesn't help jobs. We don't want that.”

Mr Murray’s comments come after economist and fund manager Christopher Joye warned that the Australian property market is “overvalued” and overdue for a “reckoning”.

Last month the IMF urged APRA to intensify its crackdown on investor lending to avoid a build-up of financial system risk. 

Investors continue to drive strong growth in mortgages despite efforts by APRA to cool the segment. The latest figures from the ABS, released on Friday, show the value of housing finance commitments increased by 0.6 per cent month-on-month in October, once again led by growth in investor borrowing. Annual investor borrowing growth now sits at 12.4 per cent, compared with negative growth among owner-occupiers of 7.7 per cent.

[Related: OECD flags housing risks, tips rates to rise in 2017]