Investor lending caps a case of history repeating

AMP Capital chief economist Shane Oliver said pressuring lenders to tighten investor lending conditions is a macro-prudential tool used similarly in the past.

“The focus on varying prudential controls to achieve macro-economic outcomes was quite common up until the early 1980s, but went the way of the dodo when it was concluded that it was only leading to distortions in the financial system as people found a way around them,” Mr Oliver said.

“So while financial system regulators, like APRA, continued to ensure prudential standards were met, from the mid-1980s varying interest rates to control the housing and economic cycle became the norm and this worked reasonably well.”

Mr Oliver noted that the last major boom of Australian property prices in 2003 took the property price to household income ratio from around three times to around five to six times, resulting in increased concern about a property bubble and poor housing affordability.

“But while the prudential regulator made sure lending standards were being maintained, prudential controls were not varied to achieve macro-economic outcomes,” he said.

However, Mr Oliver noted that this time, the pressure surrounding investor lending is different for several reasons.

“First, property price gains are nowhere near as strong – over the past five years average capital city home prices have risen at just 3.5 per cent pa. For Sydney it’s just 6.5 per cent pa,” he said.

“Second, the gains are not broad-based – while Sydney home prices are up 14.5 per cent over the year to April, for the other capital cities the gain is just 1.7 per cent.

“Third, credit growth is running at a fraction of what was seen in 2003 with total housing-related credit up 7.2 per cent over the year to April and investor credit up 10.4 per cent.”

Mr Oliver said only time will tell if APRA’s crackdown will control the Australian property cycle.