Weekly Economic Update

This week, we take a look at how price growth is comparing to people’s wages, as well as the pressure growing on regulators to reign in home loan growth

Is your house earning more than you? Quite possibly

The median house price in Australian capital cities has increased on average by $124,500 since the start of the pandemic, which is significantly higher than the median household income. Given that this is the case, it is quite possible that the capital growth of your home over the past 12 months has been greater than how much you earned over the year.

The two capital cities where house prices have jumped more than incomes in most suburbs are Hobart and Sydney. In both these cities, more than 60 per cent of suburbs have seen house price growth greater than that city’s median household income. In Sydney for example, 61.2 per cent of suburbs have had price growth of more than $99,646 over the past 12 months. Across Australia, more than 40 per cent of suburbs are currently seeing price growth greater than median household income.

The top performers by capital city aren’t generally too surprising however there are a few outliers. In Sydney, Sylvania Waters comes in second with an increase of $1.15 million while in Melbourne, the top performers are all on the Mornington Peninsula.

Pressure building on home loan growth (and what it will mean to house prices)

Pressure continues to build to reign in home loan growth with the Treasurer, Josh Frydenberg, announcing during the week that he has given backing to regulators to crack down on high-debt home loans. Further to this, the Council of Financial Regulators is currently preparing lending restriction options, while APRA will soon release its framework for implementing macroprudential policy. All this points to restrictions on home loan lending, likely to occur either late this year or early next year.

Home loan lending has accelerated during the pandemic, almost doubling over the 18 months since it began. Further to this, it is now almost $10 billion above the previous peak in 2015.

Australian regulators have had a lot of relatively recent experience slowing down the rate of credit growth mid last decade. Towards the end of 2013, lending to investors began to accelerate, peaking at $10.1 billion in April 2015. Concerns about the level of debt being taken on, high levels of apartment development, as well as speculation occurring in the housing market, led APRA and ASIC to increase their surveillance of home lending at the end of 2014.

What followed was a series of restrictions aimed at reducing lending particularly to investors. By the start of 2017, total lending to this group began to decline. By the time the Financial Services Royal Commission was announced, prices had begun to fall and investor activity had significantly slowed.

The aim of the measures was to discourage risky lending and ultimately culminated in a Royal Commission. It also led to a rapid slowdown in building activity, which was also driven by high levels of investment from Chinese apartment buyers. Prices also stabilised, and in some places fell. It certainly led to a rapid cooling of the housing market.

This time around, it isn’t just investors that are borrowing a lot. In fact, the total borrowed by owner-occupiers has increased a lot quicker. As a result, it will be necessary to target lending more broadly. Regulators will also have to be mindful of timing, given both Sydney and Melbourne are in lockdown. The economy and the housing market remain strong but we are still in a precarious position. We still have closed international borders, there is still little agreement between states on opening borders and iron ore prices dropped significantly last week. If they move too hard and house prices start dropping dramatically, this will lead to a hit on household confidence.

The impact on prices will depend on the restrictions that are put in place. At this stage, it is looking like there will be reductions in debt to income ratios. However it could also include:

• Require borrowers to have bigger deposits
• Increase stress testing of borrowers
• Restrict interest only loans held by banks
• Restrict the growth of lending (investor or total)

Accelerated growth in home lending is not unique to Australia with many other countries currently experiencing similar conditions. New Zealand implemented a 40 per cent deposit requirement for investors in May which led to house prices stabilising almost immediately. From 1 November 2021, the RBNZ will be restricting the amount of lending banks can do above a loan to value ratio of 80 per cent.

While restrictions to finance will take the heat out of the housing market, housing affordability is still a big problem in Australia. We are one of the least affordable countries in the world however it isn’t just debt driven. Housing supply, construction costs, NIMBYism and planning controls are also major drivers. It is why Josh Frydenberg announced an inquiry into housing affordability and supply in Australia in July.