LVR limits unlikely, but RBA warns of excessive speculative activity

LVR limits unlikely, but RBA warns of excessive speculative activity
LVR limits unlikely, but RBA warns of excessive speculative activity

Housing prices in Australia have been rising strongly, the Reserve Bank (RBA) told the House of Representatives inquiry into housing affordability today.

"Some of this perhaps represented an element of catch up after some earlier weakness.

"Nonetheless, prices have continued to rise significantly faster than incomes, and this has been associated with strong growth in investor activity," Dr Malcolm Edey, the RBA Assistant Governor (Financial System) advised in its submission.

Emphasising that the banks in Australia are resilient, and mortgage lending in this country has historically been relatively safe, he noted broader concerns with the "macroeconomic risks associated with excessive speculative activity, since this activity can amplify the property price cycle and increase risks to households."

He advised the RBA's discussions with the Australian Prudential Regulation Authority and other agencies on these matters are ongoing, but suggested it was “unlikely” to involve New Zealand-style loan-to-valuation caps.

The steps that might be taken to reinforce sound lending practices were "particularly for investor finance, though not necessarily limited to that,” he added.

The submission was made by Dr Edey and Luci Ellis, the RBA's Head of Financial Stability Department.

Their submission noted affordability measures will differ depending upon whether we are talking about owners or renters, and on whether we are interested in some specific market segment, like first home buyers or low-income households.

"For owner-occupiers, perceptions of affordability will depend on many things including price, household income, the cost and availability of finance, and a host of factors affecting the needs and aspirations of the buyer," the submission said.

"In any analysis it is necessary to make use of summary measures, while acknowledging that these inevitably gloss over the diversity of experience across different types of households.

"Much of the public discussion on affordability is focused on home purchasers.

"A useful summary measure is the repayment on a typical new housing loan expressed as a ratio to disposable income.

"On that metric, housing affordability in Australia has fluctuated around a broadly stable average over the past three decades, with average repayments varying between around 20% and 30% of disposable incomes.

"Currently this figure is a bit below average, but it has been rising, as the housing market has gathered momentum.

"Over the same 30-year period, the ratio of housing prices to incomes has increased substantially.

"These developments in prices and affordability have been inter related.

"Housing prices received a substantial boost from the combined effects of disinflation and financial deregulation, which lowered the cost and increased the availability of finance.

"Much of the increase in the price-to-income ratio was concentrated over the 10-year period to the end of 2003, when this ratio increased by around two-thirds.

"It is reasonable to think of this as a transitional impact on housing prices that will not re-occur.

"Both the shift to low inflation, and the comprehensive deregulation of the financial system, are things that only happen once.

"In broad terms, the adjustment of the housing market to this new environment seems to have been completed by around the middle of the last decade.

"Since then, the ratio of housing prices to incomes has been relatively stable but, for reasons already alluded to, it has been rising recently and is now at the upper end of its recent range."


Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.


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