The Reserve Bank (RBA) released their bi-annual Financial Stability Review this week, which provides a wealth of valuable insights about the fundamentals of the nation’s financial system and includes some detailed analysis on the housing market and household balance sheets which makes for essential reading.
The RBA has reiterated that households are continuing to pay down debt more quickly than required and mortgage buffers remain close to historic highs since the series commenced in 2008. In fact, the RBA estimates that the total mortgage buffer is likely to be around 14% which is the equivalent to about 21 months of scheduled interest payments at current rates. The Bank goes on to encourage borrowers to continue along their savings trajectory which will assist with Australia’s ongoing financial stability but implies that system credit growth is likely to remain slow.
The RBA has again highlighted their rising concern with regards to the new level of appetite for dwelling investment emanating from the self-managed super funds sector and the potential for this relatively new source of housing demand to drive housing prices higher. ‘One risk of the increase in property investment by self-managed superannuation funds (SMSFs) is that at least some of it is a new source of demand that could potentially exacerbate property price cycles.’
Importantly, the RBA highlights the level of investor activity that is driving the New South Wales housing market. In a similar fashion to their earlier comments about an oversupply of housing in key areas of Melbourne’s market, the RBA’s comments are aimed squarely at dampening the speculative demand from investors in Sydney’s housing market where values are about 8.5% higher over the year to date. ‘The increase in investor activity in New South Wales appears to have been particularly sharp; investor housing loan approvals now account for around 40 per cent of the value of loan approvals in the state, a share last recorded in 2004, although some of this no doubt reflects a decline in first home buyer activity. The increase in investor activity has been associated with a recent pick-up in Sydney housing price growth and reports of sale prices exceeding price guidance and valuations by wide margins. An increase in housing market activity more generally is not surprising given reductions in interest rates. However, it is important that those purchasing property maintain realistic expectations of future dwelling price growth; in contrast to the decades leading up to the crisis – when dwelling prices grew rapidly in response to disinflation and financial deregulation – long-run future growth in dwelling prices might be expected to be more in line with income growth.’
The RBA doesn’t appear to be overly concerned about low-doc or ‘non-conforming’ loans, however it is clear the Bank would like to ensure responsible lending practices are maintained. ‘Financial stability risks posed by non-conforming lending remain limited so long as it remains a small share of total housing lending, consistent with the underlying narrow scope for prudent lending to households with blemished credit histories.’