Can regulatory measures stem the spike in house prices?

Millions of Australians have spent much of the past 18 months locked out, but you wouldn’t know it from looking at the housing market.

Average home prices rose 17.6% in the nine months to September and 20.3% in the past 12 months according to CoreLogic. Regional prices are even stronger, up 23.1% year-over-year.

The annual growth rate now follows the fastest pace since the year ending June 1989, according to CoreLogic.

“Something has to be done if we do not want to exclude a generation of Australians from owning their own homes,” said Stephen Jones, Deputy Treasurer of the Labor Party.

The government hears these voices and is poised to act. A meeting of Australian financial regulators on Tuesday raised the flag of concerns about house prices and foreshadowed action by APRA in the next two months.

This means that we can expect what are called macroprudential measures – a tightening of loan-to-assessment ratios (LVRs). This is the loan-to-deposit ratio that deposit banks can use to finance real estate.

Will it work?

The question for potential buyers is to what extent this will affect home prices. Well, the last time it was attempted in the middle of the last decade, the 80 percent LVR restrictions along with measures against investor lending caused house prices to fall by maybe 10 percent. .

But it was also a time when foreign investors were excluded from the market. Restriction of foreign investors can only happen once, so its effects on falling house prices cannot be repeated.

Observers believe the new regulatory measures will not do as much as people want in terms of limiting the spike in house prices.

Scott Keck, director of Charter Keck Cramer real estate appraisers, said the market would cool soon anyway. “It’s because home values ​​as a percentage of net disposable income would become unaffordable anyway, and I’ve started to feel it on the market over the last month or so. “

He also believes that macroprudential rules in the current environment would not achieve their goal. The first buyers of houses on the outskirts of the city are the ones who have the most difficulty entering the market “but the lots of houses and land have not seen such large price variations as in the established areas of the center. -ville, ”Mr. Keck said.

Restrictions on LVRs would hit them, but not people in areas where the market is very hot.

“Anyone who has $ 2 million in cash or stock to move into a $ 3 million house will not be affected by the macroprudential measures,” Kreck said.

More is needed

Macroprudential measures are “necessary but not sufficient,” said Emma Dawson, executive director of the Per Capita think tank. This is because they will not hit the investors who drive the market up in the long run.

“If you look at investors who take 95% equity on existing properties and put 5% on another property, that’s what needs to be cracked down on,” Ms. Dawson said.

The big challenge, according to Ms. Dawson, is “the fiscal parameters that oppose affordable housing.” These, she says, are restrictions on negative debt and increased capital gains tax.

But they are off the political agenda following the Labor Party’s defeat in the last election when it ran on these policies. Chris Richardson, partner of Deloitte Access Economics, adds to this list by at least partially including the value of dwellings in the means test of the age pension.

But he says all of these measures would not provide the benefits defenders demanded. “In total, that would probably mean a difference of 4 or 5% in house prices,” said Dr Richardson.

The real cost of housing

There is also a question mark about how unaffordable housing is becoming. Per capita research says the rise in prices means that the generation that bought homes in 1970 was spending 11.2 percent of after-tax household income on housing.

Buyers of the 1985 generation would have seen this figure rise to 19.5%, and buyers of 2000 would have ended up with a massive 25.5% tax on household income.

However, since that date, interest rates have dropped significantly, with Dr Richardson noting that mortgage management costs have fallen since they peaked at 16.4% in 2010, as shown in the table below. above. The difference between the two results is that Dr. Richardson’s figures include sets of income and reimbursements for all age groups, while the per capita figures examine the situation for different age groups.

“Housing affordability is better today than the average for the past two decades,” said Dr. Richardson. “There has been a big increase in the price you pay, but as interest rates have gone down, the cost of repaying the loan has gone down. “

But for many people struggling with low wages, this is not the case, and people who have borrowed heavily in recent years have not seen their mortgage liabilities drop in the first few years of their loan term. This is because low inflation and low wage growth mean that their relative debt burden has not decreased as much as in previous generations.