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The major bank has released its Housing Pulse for May 2021, in which it said that it expects prudential policy to remain unchanged in 2021.
However, it said that with house prices rising more strongly than expected, “a move to tighten conditions now looks set to come through a bit earlier than we previously thought, most likely in the first half of 2022”.
The upgrade in predictions has followed observations by Westpac of the first “rumblings” of a shift in prudential policy.
In particular, the major bank noted that the Reserve Bank of Australia (RBA) has shifted its rhetoric on housing in its monetary policy decision statement.
It said: “Whereas in April we had a general comment, ‘lending standards remain sound and it is important that they remain so in an environment of rising housing prices and low interest rates’, May indicated a clearer move into ‘watching closely’ mode.”
Westpac quoted the RBA as saying in May that “given the environment of rising housing prices and low interest rates, the bank will be monitoring trends in housing borrowing carefully, and it is important that lending standards are maintained”.
Indeed, RBA governor Dr Philip Lowe reiterated this stance in his statement on the central bank’s monetary policy decision for June, stating that property prices have increased in all major markets and housing credit growth has picked up.
He said: “Given the environment of rising housing prices and low interest rates, the bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”
The tightening would be gradual
Westpac said in its report, however, that if and when lending standards are tightened, regulators would be gradual in their transition from “watching to acting”.
The bank provided several reasons for this approach, including the fact that all arms of policy is currently focusing on securing Australia’s recovery from the COVID-19-driven recession in 2020.
“Both monetary and fiscal policy are firmly targeting strong, above trend growth to drive a return to full employment over the medium term,” the report said.
“While the economy has sustained a strong rebound to date, much of this strategy rests on maintaining current strong confidence, particularly in the consumer space where continued robust gains in spending depend heavily on consumers being prepared to lower savings and draw on the large reserves accumulated over the last year. Prudential measures deployed too early could clearly rattle that confidence.”
The major bank also noted that key metrics for aggregate risk still have not met levels that would be of significant concern for regulators.
“On leverage, the aggregate household debt-to-income ratio is now rising but on our estimates is still a touch below pre-COVID levels,” the report said.
“Likewise, the pace of housing credit growth has lifted but remains well below the 7.0 per cent annualised pace that looked to be a key threshold based on previous tightening episodes.”
It added that new finance approvals would need to rise a further 50.0 per cent or more for annual housing credit to begin pushing towards 7.0 per cent a year.
In addition, Westpac noted that data has shown few signs of an increase in riskier activity to date, with data showing only a slight uptick in the share of “high loan-to-value ratio (LVR)” loans, and little movement in the share of non-standard loans.
Finally, the bank said that regulators expect lenders to “self-regulate”, with the measures implemented between 2015 and 2017, including “micro-prudential” changes that it said has improved the consistency and discipline lenders use to make borrowing capacity and serviceability assessments.
House prices to surge 15.0 per cent in 2021: Westpac
Westpac said that it is expecting a 15.0 per cent spike in house prices in 2021, followed by a more subdued 5.0 per cent rise in 2022.
These forecasts are “bring-forward” of its previous predictions, which stated that prices would rise by a cumulative 20 per cent over the two years, it said.
Commenting on the house price forecasts, Westpac senior economist Matthew Hassan said that affordability and macro-prudential measures would slow the market from this point.
“Australia’s housing markets are fizzing. The broad–based lift that was gathering three months ago is now a fully fledged boom,” he said.
“Aside from the strength of price gains in recent months, the most striking aspect has been the breadth of the upturn – most of the 90-odd detailed sub-markets we track recording gains running at a double-digit annualised growth pace and none recording declines.
“This is very rare in the history of Australian property cycles, which more usually see a few markets ‘sit it out’ when prices are on the move.”
National turnover in the housing market is nearly 30.0 per cent above its pre-COVID-19 peak, and prices are 8.5 per cent above their pre-COVID highs, pushing new record levels in most markets, the report said.
While property listings across the wider market have been catching up with sales levels, there is still a 15 per cent to 20 per cent gap nationally, while stock on market is still 2.8 months of sales (the long-run average is 3.8 months), the report said.
[Related: Lending restrictions have led to rental undersupply: PIPA]
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