Loan pre-approvals by banks can be confusing. They aren't a rubber stamp to buy whatever you want, but some buyers are being a little too cautious.
How to keep property simmering…not boiling
We are not on the cusp of a housing boom but one could eventuate if policy makers are not careful. That would be calamitous for the economy and Australians if interest rates had to be jacked up several percentage points because a housing boom ignited inflationary pressures. So what’s the best approach to keep conditions in the Goldilocks zone – not too hot, not too cold?
Prevention is definitely better than cure. It’s for this reason that I believe that the Reserve Bank should avoid cutting rates again. I agree with the Board’s statement in its September meeting minutes that, as a result of the 225 point drop in the cash rate over the last two years, “lending rates had declined to historically low levels...which…were continuing to provide a substantial degree of policy stimulus to the economy.” Low rates are definitely providing ongoing stimulus to the property market and will do for months to come.
Indeed I’m bemused by some high profile retailers who are leading the clarion call for further interest rate cuts of up to one-half of a per cent by Christmas, ostensibly to help the economy. Not only are they coming across as absurdly self-serving, but were such a scenario to eventuate they would eventually come to regret it more than most once interest rates lifted again.
I do of course have sympathy for those parts of the economy that are still struggling from the relatively high Australian dollar and muted consumer confidence. And it is of course this multi-speed economy that poses a terrible dilemma for the Reserve Bank.
Given the inherent limitations of its principal policy lever – the shifting of interest rates – I expect we will hear a lot of ‘jaw-boning’ by the RBA Governor. On one hand, the RBA is likely to assure us that low interest rate settings won’t set off inflationary pressures. But there may also be a selective warnings aimed at prospective property buyers not to be too exuberant in their borrowings.
Moreover, the Reserve Bank may well apply pressure on mortgage lenders to maintain and even tighten their lending standards. The Board’s September minutes stated that “members agreed that it was especially important that banks maintained prudent lending standards.” Don’t be surprised if this point is reinforced in behind-closed-doors meeting between the Bank, the prudential regulator APRA, and the big four retail banks.
There is debate at the moment about whether Australia should follow the example of New Zealand and tighten loan-to-value ratios. In current conditions, it is an appropriate policy setting for retails banks to insist that buyers bring at least 10 per cent and ideally 12 per cent of their own funds – either through a deposit or equity from another asset – to a property transaction.
However I reject the calls by some to restrict borrowings to 80 per cent of a property’s value. Minimum deposits of 20 per cent would effectively shut out most first home buyers from the market forever. With a first home often costing $400,000-plus in our major capital cities, raising a minimum of $80,000 in a deposit from after-tax dollars is ludicrous. It would inevitably lead to state governments intervening with wasteful, expanded incentives for first home buyers…again!
A better solution to both the over borrowing and future run away market scenarios would be an improved, workable First Home Owners Savers Account that better incentivised buyers so they could build a sizeable deposit quickly and without undue restrictions or interference from government.
All these measures attempt to manage demand. Of course, there is more to housing policy than just that. Ultimately, we have to grasp the nettle that is the supply challenge.
We have a new federal government. It’s a government that – in the words of its principal election document – has promised to “improve housing affordability by supporting housing development, working with the states to reduce red tape that holds up supply and construction.”
These are worthy goals. But they need to be aware that for too long many developers have been building over-priced, over-sized properties in fringe suburbs or expensive apartments in CBD fringe towers, often poorly served by employment opportunities and infrastructure such as schooling, health, shopping, entertainment and green spaces.
It’s time the federal government pushed the states harder to shift the focus of development towards in-fill developments, containing smaller, more affordable town houses and apartments.
I recognise that this will take time. But we have to start now if we’re to avoid relying once again on just throttling demand and, with it, young people’s aspirations to own a home.
One can never hope to completely smooth the investment cycle. There will always be peaks and troughs. But as we stand today, at the early point of a property market upswing, I support judicious regulatory activism in order to ensure the market stays ‘just right.’