The Federal budget always seems to throw up plenty to discuss. The media understandably pounce on the headline elements of the budget.
Sometimes budget measures which are the least discussed can be the most intriguing.
The Government has upgraded the ability of the Australian Prudential Regulation Authority (APRA) to curb excessive and poor lending into the housing sector. APRA now has the authority to limit bank lending on a regional basis and even postcode basis, if need be.
The Australian economy is a tale of depression and boom. The Reserve Bank of Australia (RBA) would probably like to cut interest rates further to assist and stimulate the WA & SA economies. Conversely, they would probably prefer to see rates rise in Melbourne and Sydney to curb the booming housing market. Alas, interest rates are a blunt instrument, as it is for one it is for all.
Reports and commentators are now warming to the fact the RBA may need to cut rates again – in late 2017 or early 2018. This is far from certain but the next move is likely to be down more than up if we examine current data. Unlike previous rate cuts, the benefits of future interest rate cuts are less likely to flow through to the Sydney or Melbourne housing market, as APRA will tighten on behalf of the RBA where required.
The housing boom was never the intention of the RBA. It was a side effect of the RBA cutting rates to lower the AUD and offset the mining downturn.
These budgets measures that enhance APRA’s influence on the banks and non-bank lending is intelligent on the one hand and too late on the other. The Sydney market is already showing signs of cooling after property prices have risen 70 – 80% in the past 5 years. These gains were a direct cause of foreign buyers and cheap money.
The market has begun to cool as a result of several measures introduced by the APRA. The most recent was a crackdown on interest-only loans, which have been some of the riskiest, historically.
As aggressive lending or price bubbles show up in the data APRA will now be able to step in and enforce prudent lending, even if the lenders are not. The Government did not provide these powers for them to be ignored, so expect it to play a role in the property market going forward. In the past, lower interest rates meant higher property prices. Provided APRA enforces its power, lower interest rates won’t necessarily have the same stimulatory impact on property prices as it has in the past.
Hot locations within a booming property market or locations deemed to have an apartment oversupply risk are the most likely to be the first targets of the APRA’s new powers. Non-bank lenders have also had additional regulation heaped on them to ensure they don’t step to fill the bank’s void.
Smart policy. Let’s just hope it’s not too late.