Central bank speaks on property, mortgage trends in 2019

Looking to past data, Mr Lowe first referred to the mid-2000s, the mining boom in Western Australia, and NSW today.

In each of these examples, there was a notable shift in population growth:

• in the first, the population increased while new supply lagged behind to meet the demand;
• in the second, the new supply only came into the picture when the boom saw a significant population slowdown;
• while in the third, housing supply has seen a rapid increase yet population growth is moderating.

Foreign investment is another contributing factor, where the number of foreign investment in residential real estate approvals have fallen by 75 per cent from approximately 40,000 to 10,000.

“In the middle years of this decade, there was a surge in foreign investment in residential property, particularly from China, Mr Lowe said.

“In Australia, the demand was particularly strong in Sydney and Melbourne, given the global profiles of these two cities and their large foreign student populations.

“More recently, this source of demand has waned, partly as a result of the increased difficulty of moving money out of China as the authorities manage capital flows.”

This decline in foreign investment has also coincided with the decline in local investment, Mr Lowe noted, as he referred to NSW the “epicenter of strong investor demand”, which saw investor housing loan approvals decline from its most recent peak of over $4 billion in late 2016/early 2017 to approximately $2.5 billion by the end of 2018.

Following the previous market peak, Mr Lowe said the general unaffordable situation in the market was due to the restricted housing supply and the desire of investors to benefit from a rising market in a low interest rate environment.

With these high prices, 2017 saw the median home price to income ratio reach “very high levels” in Sydney and Melbourne, which also meant the deposit required for purchasing property increased.

“At the same time, the combination of high prices and weak growth in rents meant that rental yields were quite low. So, naturally, momentum shifted,” Mr Lowe said.

“Given the big run-up in prices and the large increase in supply, a correction at some point was not surprising, although the precise timing is nearly impossible to predict.”

Lenders became more cautious

Low interest rates across the board typically make it easier to secure finance, but there are other factors at play in the current environment which have led to a “noticeable slowing in housing credit growth, especially to investors," according to Mr Lowe. 

“It is clear there has been a progressive tightening in lending standards over recent years. The RBA’s liaison suggests that, on average, the maximum loan size offered to new borrowers has fallen by around 20 per cent since 2015,” Mr Lowe said.

“Even so, only around 10 per cent of people borrow the maximum they are offered. Sensibly, most people borrow less than what they are offered, so the effect of this reduction in borrowing capacity has not been particularly large.”

However, also according to the RBA liaison, lenders were also becoming more cautious and risk averse.

“There was a heightened concern by some loan officers about the consequences to them and their career prospects of making a loan that might not be repaid if the borrower’s circumstances changed,” Mr Lowe said.

“This, along with greater verification of expenses and income, led to an increase in average loan approval times, although some lenders have invested in people and technology to address this.”

Regardless, the liaison said that approval rates have remained mostly consistent, but the tightening in finance is more about a reduction in demand for credit than the reduction in supply of credit.

“When housing prices are falling, investors are less likely to enter the market and to borrow. So too are owner-occupiers for a while. Consistent with this, the number of loan applicants has declined over the past year,” Mr Lowe said.

“There is also strong competition for borrowers with low credit risk, which is not something you would expect to see if it were mainly a supply story.”

Despite the low demand for credit, Mr Lowe said the RBA is still observing credit availability, as they want lenders who are both cautious and risk-takers.

“As lenders recalibrated their risk controls last year, the balance may have moved too far in some cases. This meant that credit conditions tightened more than was probably required,” he said.

“Now, as lenders continue to seek the right balance, we need to remember that it is important that banks are prepared to take credit risk. And it’s important that they have the capacity to manage that risk well. If they can’t do this, then the economy will suffer.”