APRA takes modest step into housing … with political echoes of 1961

The first step to take some heat out of the runaway Australian property market has been taken – and the modesty of that step is a testament to the economic and political issues at stake.

On the economic front, record-low interest rates (coupled with tens of billions of “free” cash from all levels of government) have helped underpin the economy and the housing market.

The prudential regulator has taken a modest step towards taking heat out of the property market, but there are major economic and political risks around the move.Credit:Peter Rae

As Reserve Bank governor Philip Lowe recently noted, higher interest rates might take heat out of house prices but they would also mean fewer jobs and lower wages growth.

But even Dr Lowe knows a median house price of $1.3 million in Sydney and more than $950,000 in both Canberra and Melbourne means the chances of a debt-fuelled inter-generational breakdown across society is increasing.

Hence, the step by the Australian Prudential Regulation Authority with its decision to increase the minimum interest rate buffer banks use when considering how much a person can borrow.

Instead of 2.5 percentage points, the buffer will now be 3 percentage points. On the current average mortgage rate of 2.32 per cent, that means a bank determining if their borrower can withstand a rate of 5.32 per cent rather than 4.82 per cent.

According to APRA, this will reduce by about 5 per cent the maximum borrowing capacity of a potential home owner.

It is extremely modest.

The Commonwealth Bank’s head of Australian economics, Gareth Aird, noted just 8 per cent of the CBA’s clients through the first 6 months of this year borrowed the maximum available to them.

“Our initial assessment is that current momentum in the housing market is sufficiently strong that the overall impact on dwelling price growth next year will be modest,” he said while predicting house prices to climb another 7 per cent through 2022.

No small wonder that APRA has also left the door open to other potential actions.

It made clear one option – a limit on debt-to-income borrowing – could have unintended consequences such as pushing up interest rates on some borrowers and rationing credit to others.

If economists are correct, and house prices continue to easily out-pace income growth, the issue won’t go away. The average mortgage in NSW to buy an established home is already at an all-time high of $755,000. Across Victoria it is $630,000.

APRA has to balance its concerns about the property market with the broader economy.

There are also political issues around these and any further changes.

Despite the crocodile tears of the government and Labor about spiralling house prices, both parties know a drop in the single largest asset of most Australians would have huge political repercussions.

The Coalition played to this with its campaign against Labor’s modest proposals to reform negative gearing at the 2019 election.

Yet an older election could be a template for Labor at the 2022 election.

In 1961, a credit squeeze instigated by then-treasurer Harold Holt pushed the country into a small recession with the number of unemployed doubling over a 12-month period. Labor won the two-party preferred vote and fell two seats short of a majority in the House.

Already, some in Labor are talking about “Josh Frydenberg’s credit squeeze” and its impact on people who want to use record-low interest rates to buy a home.

As the banks admit, APRA’s changes will reduce the number of people in the market. It will reduce how much some of them can borrow. That’s the entire point of the announcement.

Australia’s dependence on the property market as an economic driver is about to be tested.

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