Regulators to tread lightly on macro changes: ANZ

ANZ senior economist Felicity Emmett noted that regulators are considering a number of macroprudential policy measures to rein in growing household debt relative to income, including increasing the interest rate buffer used in serviceability assessments (currently at greater than 2.5 per cent), restrictions on the share of high debt-to-income loans, and restrictions on high loan-to-value ratio (LVR) mortgages.

However, she said that regulators would adopt a cautious approach to macroprudential tightening as they would aim to slow credit growth without triggering a sharp slowdown in the housing market, adding that this “calibration will be tricky”.

Indeed, federal Treasurer Josh Frydenberg recently met with the Council of Financial Regulators to discuss a range of issues, including the housing market (amid high house prices and rising debt-to-income levels).

In a statement provided to Mortgage Business, Mr Frydenberg said: “Off the back of historically low interest rates Australia’s housing market has seen strong growth. It is a development replicated in many other countries.

“A positive feature of this housing cycle compared to that of the last is a higher proportion of first home buyers and owner occupiers entering the market.

“With Australia’s economy well positioned to strongly recover as restrictions ease it is important to continually assess the appropriateness of our macroprudential settings.”

As such, Ms Emmett predicted that while it is possible that regulators may introduce all three measures mentioned above, ANZ economist’s view is that the first two options are more likely than the third as restricting high LVR loans would likely have the most significant impact on first home buyers (FHB).

She said: “We anticipate regulators will go lightly in the first instance. Their aim would be to slow credit growth to a level closer to income growth (which averaged close to 4 per cent in the decade prior to the pandemic).

“They will want to avoid a sharp crackdown on lending which could feed through to lower house prices and weigh on consumer spending and housing construction at a time when both monetary and fiscal policy are aimed at cementing a strong economic recovery. Achieving these different outcomes will require a delicate balance.”

Resi housing index third highest on record despite dip

Her comments have come at the same time as the release of the ANZ-Property Council Survey for the third quarter of 2021, which revealed that residential property sentiment declined modestly in the last survey.

The survey – which was taken between 30 August and 15 September while NSW and Victoria were in lockdown – found that a drop in expectations for house prices drove the decline in the September survey.

However, the index has remained at its third highest on record.

A net balance of 72 per cent of firms in the residential sector said that they expect house prices to rise over the coming year, but they have continued to soften their expectations of price gains.

Ms Emmett said that some moderation in expectations is not surprising given house prices have surged by 17.4 per cent over the past year, representing the strongest annual gain since 2002.

“Prices do appear to be moderating from the extraordinary increase in the first half,” Ms Emmett said.

“However, further solid gains look likely with the cash rate set to stay at the historic low of 0.1 per cent until 2024.”

House price growth could slow from 20 per cent in 2021 to closer to 7 per cent in 2022 if macroprudential controls are introduced this year, according to Ms Emmett.

But the 2022 forecasts would need to be revised up, “perhaps by a considerable margin”, if macroprudential policy is not tightened, she noted.

The residential construction outlook edged marginally lower while remaining positive. More than half of all surveyed firms (51 per cent) said that they expect an expansion in activity, down from 52 per cent in the June survey.

“In the residential sector, the outlooks for both construction and prices are benefitting from targeted stimulus like the HomeBuilder program and record low mortgage rates,” Ms Emmett said.

Office occupancy slumps amid lockdowns

On the other hand, the office sector is being pummelled by ongoing lockdowns, with the latest office occupancy survey showing levels in Sydney and Melbourne are at 4 per cent and 7 per cent of pre-pandemic levels respectively.

The latest round of lockdowns has stalled the recovery in sentiment in office property, affecting occupancy, and highlighting concerns about the extent and permanence of working from home arrangements, Ms Emmett said.

“While mobility restrictions are the main factor at present, a more permanent shift to working from home is also a factor,” she said.

Prior to the current lockdowns, the largest influence on office occupancy was a preference for greater flexibility and working from home.

According to the Australian Bureau of Statistics, prior to the lockdown, of the 30 per cent of businesses with staff then working from home, 80 per cent expected to have some working from home permanently.

Business conditions, consumer confidence, and the labour market have all fared significantly better through the current lockdown compared with last year’s national lockdown, the survey found.

“Businesses have adapted their working models and households are managing well. Ongoing fiscal and monetary support, combined with the vaccination rollout, has maintained confidence economic activity will rebound quickly once restrictions lift,” Ms Emmett said.

“While economic growth expectations declined in the latest ANZ-PCA Survey, they remain significantly above pre-pandemic levels, with a net balance of 18 per cent of respondents expecting economic growth to lift over the next year.

“These expectations of strong economic growth over the next year are clearly supporting property sentiment.”

Housing market confidence rebounds

The Westpac-Melbourne Institute Index of Consumer Sentiment revealed that in August, the “time to buy a dwelling” index rose by 8.8 per cent, recovering all of the decline in July.

However, the index has remained 26.8 per cent below its November peak, and around the lows seen in previous cycles during the global financial crisis (GFC).

Deteriorating housing affordability has continued to weigh down on consumer sentiment.

This is especially evident in the state breakdown, with buyer sentiment in the most affordability-constrained states showing “outright pessimism” – with NSW at 94 and Victoria at 87.3.

However, it is in optimistic territory in Queensland (105.3) and Western Australia (118.8).

The Westpac-Melbourne Institute of House Price Expectations lifted 1.4 per cent to remain near an eight-year high at 158, demonstrating that consumers have remained bullish on their house price outlook.

This was particularly evident in NSW, where the index surged 5.7 per cent to 161.

Commenting on the housing trends, Westpac senior economist Bill Evans said: “The picture continues to point to a rebalancing in markets as investors are encouraged by rising prices and the prospect of capital gains while owner occupiers respond to deteriorating affordability.”

[Related: Almost a third predict rate rise over 12 months: ANZ]

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.