'Most promising thing' in 25 years for first home buyers
There is a lot riding on the policy recommendations from the banking royal commission, not least of which is the stability of the Australian property market, according to some respected analysts.
Independent economist Saul Eslake said there was potential for the royal commission’s recommendations to have what economists refer to as “unintended consequences”.
The unintended consequences Mr Eslake is referring to include a steep fall in house prices spurred on by a royal commission-inspired clampdown on bank lending.
Capital Economics chief economist Paul Dales said while house price falls to date have been small, Australia could be in for a record housing decline, at least in its recent history.
“At the moment the trajectory is a bit worrying cause the house prices seem to be declining at a faster rate and, in our view at Capital Economics, this will eventually prove to be the largest downturn in Australia’s modern history,” he said.
Mr Dales is forecasting a protracted slowdown in the housing market as a result of a crackdown in bank lending standards, the banking royal commission itself and rising interest rates.
“There’s significant time delays with these things,” he said.
“I would have thought over the next six to 12 months is where we would, if there was going to be a big pullback in lending, that’s when we would see it and then, thereafter as and when the royal commission makes any recommendations and the Government implements them, the next six to 12 months after that.
“So it’s probably going to be quite a long, drawn-out process.
“And this is what I think is quite interesting — whereas in America during the global financial crisis lending was just cut off from one day to the next, banks just decided not to lend anymore, this is a slightly different situation.
“I think it’s going to be a very gradual, slow grind and it won’t be as easy to see.”
RBA comfortable with current, modest housing falls
Reports earlier this week suggested the Reserve Bank of Australia and Treasury privately cautioned the Morrison Government to be careful with its regulatory response to the banking royal commission, fearing that harsh penalties could put the brakes on lending to home buyers and businesses, which would not be great news for the economy.
New home buyers’ credit crunch
Mr Eslake goes further — he believes Commissioner Kenneth Hayne will seek private tutorials from the Reserve Bank and APRA (the bank regulator) in an effort to understand the full impact of any decision he makes.
It is a move that RN Breakfast understands the Council of Financial Regulators, which includes the RBA, would agree to.
“I think he will give some consideration to the advice that’s coming from the Reserve Bank and others who are knowledgeable about the property market and the way the financial system works,” Mr Eslake said.
It is demand from investors that is taking a hit following earlier moves from the banking regulator APRA to cap growth in investor loans at 10 per cent per annum (a cap that has now been removed) and later to limit the proportion of interest-only lending — a favourite loan product for many property investors.
Interest-only loan a no-go zone
“Both of those measures, I think, have played an important role in reducing demand from investors, which in turn seems to be the major factor behind the slowing in the property market and the decline in property prices that’s emerged over the last 12 months,” Mr Eslake said.
That goes to the heart of what is happening to the housing market — the banks that feed it are taking away some investor fodder, but so far it has not gone beyond that, according to CLSA banking analyst Brian Johnson.
“The most likely outcome from the royal commission is that we remove some of the ill-disciplined lending that we were seeing,” he said.
‘Most promising thing’ in 25 years for first home buyers
With policy recommendations from the royal commission still to come it is anyone’s guess as to how the banks and the property market will ultimately fare.
In the lead-up to the next federal election, though, shadow assistant treasurer Andrew Leigh said Labor would be sticking to its policies around capital gains tax and negative gearing in order to take further price pressure off the market.
He welcomed the exodus of investors but said first home buyers still needed more support.
Mr Eslake said first-time buyers may get that support from royal commission recommendations and possible further independent rate rises from the major banks that could produce property price declines of as much as 20 per cent from peak to trough.
Not if, but by how much
“I don’t think the decline in property prices is as bad news as it’s often portrayed,” he argued.
“For those who own property it’s obviously not a good thing, but for the growing number of Australians who’ve been locked out of the property market over the last 25 years a decline in prices of the order of 10 to 20 per cent over a two or three year period, especially if happens without any significant increase in interest rates, could be the most promising thing that’s occurred for more than 25 years.”
The Grattan Institute’s chief executive John Daly agrees.
“I think Saul’s right — that, if you want housing to be more affordable particularly if you want it to be more for first-time buyers, then you want [it] to be cheaper,” he said.
“The flattening off of house prices that we’ve seen over the last 12, 18 months is without doubt good news for first home buyers.
“That said, it is getting tougher for them to get a loan because the banks have toughened lending standards, although a lot of what APRA did is aimed at investors.
“The things coming out of the royal commission in terms of insisting on various ratios and so on in terms of borrowers’ incomes and how much they are allowed to borrow has probably made it harder for first home buyers than it used to be and I think there’s a question mark about whether it’s rational for that to happen.”
The Government has repeatedly said that Commissioner Hayne, who is due to hand in his final report by February 1 next year, can have more time if he needs but, so far, he has made no such request.