Macroprudential controls ‘just a cyclical response’: AMP Capital

AMP Capital chief economist Dr Shane Oliver has thrown his support behind tightening macroprudential controls to slow record levels of housing finance, adding it was “arguably overdue”.

However, he has pointed out that macroprudential tightening “is just a cyclical response and more fundamental policies are needed to address poor housing affordability”.

In an analysis piece, Dr Oliver has explored why Australian housing is so expensive and suggested mechanisms to improve poor housing affordability.

His comments have come amid growing speculation that regulators may soon intervene with new macroprudential measures to reduce risk in the financial system and perhaps limit the amount lenders can lend to borrowers.

Federal Treasurer Josh Frydenberg recently met with regulators to discuss the housing market amid soaring house prices and rising debt-to-income levels.

He said that he joined the Council of Financial Regulators to discuss the state of the housing market, adding that this has been a particular focus for both the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA).

While mainstream media reports have suggested that the nature of intervention could include the introduction of new debt-to-income ratios (which has taken lenders by surprise), there has not been any confirmation from the regulators around what specific policy measures they intend to implement.

Housing affordability now a ‘chronic’ issue

In his analysis, Dr Oliver noted that while housing affordability has been a lingering issue in Australia since the 1990s, it has evolved from a “periodic cyclical concern” to a chronic problem.

With house prices rising by around 20 per cent over the last year, the issue has been at the forefront once again, he added.

“The ratio of average house prices to average household disposable income has more than doubled over the last 30 years from around three times to around 6.5 times,” Dr Oliver said.

“Affordability has deteriorated more in Australia than in other comparable countries. According to the 2021 Demographia Housing Affordability Survey, the median multiple of house prices to income for major cities is 7.7 times in Australia compared to 4.8 times in the UK and 4.2 times in the US.

“In Sydney, it’s 11.8 times and in Melbourne [it’s] 9.7 times.”

New CoreLogic data has revealed that housing values have been rising at the fastest annual pace since June 1989 (but the monthly rate of growth has continued to taper).

CoreLogic’s national home value index rose another 1.5 per cent in September, and 17.5 per cent over the first nine months of the year, and is 20.3 per cent higher over the past 12 months.

Dr Oliver said that two main factors have driven the surge in house prices relative to income over the last two decades.

The first is the shift from high to low interest rates, which has boosted borrowing ability, and buying power.

Secondly, there has been insufficient housing supply compared to demand. Since the mid-2000s, annual population growth grew by around 150,000 people per annum but this was not matched by a proportionate increase in dwelling supply.

Furthermore, there has been a concentration of the population in just a few coastal cities, he said.

Multi-year plans needed to address affordability

As such, Dr Oliver has suggested that tightening macroprudential controls is indeed required as more than 20 per cent of new loans are being approved for borrowers with debt-to-income ratios above six times, up from 14 per cent two years ago.

“The main options are restrictions on how much banks can lend to borrowers with high debt to income ratios and high loan to valuation ratios and increased interest rate servicing buffers,” Dr Oliver said.

He noted first home buyers would require some sort of exemption to ensure that they are not disproportionately impacted by any macroprudential controls.

However, pointing out that macroprudential tightening is just a cyclical response, Dr Oliver suggested that more fundamental policies with a multi-year plan involving state and federal governments would be required to tackle poor housing affordability, including:

• Measures to boost housing supply, including relaxing land-use rules, releasing land faster, and speeding up approvals processes
• Aligning immigration levels in a post-pandemic environment with the property market’s ability to supply housing
• Encouraging greater decentralisation to regional Australia through appropriate infrastructure and measures to increase housing supply
• Tax reform including replacing stamp duty with land tax (to reduce barriers for empty nesters who want to downsize), and reducing the capital gains tax discount (to remove a distortion in favour of speculation)

Moreover, he argued against the introduction of grants and concessions for FHBs as they would further inflate house prices.

He also argued against abolishing negative gearing (while supporting capping excessive benefits), saying it would inject another distortion in the tax system and could have a negative impact on supply.

House price outlook

National property price growth could grow by around 20 per cent this year, and have already risen by around 17 per cent so far, Dr Oliver said.

However, prices growth could slow in 2022 to around 7 per cent, driven by worsening affordability, fewer government incentives, potentially higher fixed mortgage rates, lower levels of migration, and macroprudential tightening.

He concluded: “If the latter does not happen, then we are likely to have to revise up our house price forecasts.”

Balancing macro tightening with opportunities for FHBs

Brodie Haupt, CEO & co-founder of digital lending and payments provider WLTH echoed Dr Oliver’s concerns about the consequences of macroprudential tightening on FHBs.

He noted that there has been significant noise around how much lenders can lend to borrowers with high debt-to-income ratios and high loan-to-value ratios, in addition to increasing interest rate servicing buffers to reduce debt.

However, he cautioned: “While these can indeed be viable strategies, there is a very fine line between tightening lending standards for financial stability and taking away the opportunity for FHBs to get into the market when they have a chance.”

Mr Haupt said that while property investors were the “usual suspects” for inflated house prices, it is currently FHBs who are flooding the market.

As such, he said informing and educating FHBs would be critical.

“It should be emphasised that we are in a low-interest environment at the moment, but it can't remain in the long-term,” Mr Haupt said.

Addressing homebuyers, he concluded: “Start saving for the emergency fund now, curb unnecessary spending as soon as possible, do your research, but don't be afraid to act.”

[Related: Returning Aussies, new residents buoy housing market]

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.