Industry at loggerheads over cause of housing slump

In his address to the Financial Services Institute of Australia (FINSIA), the Reserve Bank of Australia’s deputy governor, Guy Debelle, acknowledged that the prolonged effects of the Australian Prudential Regulation Authority’s macro-prudential caps on investor and interest-only lending have curbed demand for housing.

“The integral relationship between debt and housing prices means that these measures have clearly influenced conditions in the housing market,” Mr Debelle said.

Mr Debelle pointed to data from the Financial Stability Review, which found that when differentiating between “high” investor regions and “low” investor regions, high investor regions had very similar price growth to low investor regions before the APRA benchmark was applied.

The deputy governor added that, in contrast, house price growth was “notably slower” in the higher investor regions after the benchmark was introduced.

However, Mr Debelle dismissed claims that the recent drop in housing values was triggered by tightening in lending standards, arguing that the fall in housing prices is a “combination of a number of other factors”, which include “the very large increase in the supply of houses” and a “reduction in foreign demand”.

“Some have attributed the slowing in housing credit solely to a tightening in the supply by banks in response to regulatory actions,” the deputy governor said. “Others have suggested there has been a weakening in housing demand and so demand for credit, including because of the high level of and weaker outlook for housing prices.”

He continued: “To me, reductions in both the demand and supply of credit have been at play and it is hard to separate their effects.

“For example, tighter lending conditions have reduced how much some people can borrow, and this contributed to weaker demand for properties and so softer prices. Price falls have themselves contributed to weaker demand by investors who are no longer confident of rising values.

“Assessing the relative importance of demand and supply is also complicated by the fact that banks have cut back most on their lending to less creditworthy borrowers but have more aggressively targeted safer borrowers with lower interest rates.”

However, while agreeing that both a drop-off in demand and the tightening of credit have contributed to the fall in home values, economists at ANZ Research have stated that tighter credit was the main trigger of the recent fall in property prices.

“In trying to explain the reason for the fall in house prices, there is an ongoing debate about the extent to which reduced demand for housing or tighter credit supply are responsible,” the ANZ economists noted.

“We agree with the RBA that both are at work. But we think it’s clear that the initial trigger for house price weakness was tightening credit supply.”

The economists added that lending policy changes implemented by banks off the back of the financial services royal commission re-routed the trajectory of housing market activity.

“After the initial impact of the APRA policy shift in 2017, the housing market was in the process of stabilising by late 2017/early 2018,” the economists observed.

“This is evident in both the auction clearance rate and house prices themselves.

“We then see a sharp turn lower in both following the start of the [financial services royal commission], with its initial focus on mortgage lending.”

[Related: Government urged to limit ‘destructive’ APRA powers]