Concocted Culprit

An Asian Lesson for Sydney's Property Bubble

A few draconian restrictions would work wonders, if only there was the political will.

Looking at the headlong growth in Australian house prices -- up 19 percent from a year earlier in Sydney in March -- it's tempting to believe that the market is simply uncontrollable.

In 2014, the Australian Prudential Regulation Authority, or APRA, announced measures to restrict the increase in investment mortgages. For three quarters it seemed to be working, with loan growth to that segment turning negative -- but lenders simply switched their attention elsewhere. While investors languished, loans to owner-occupiers rose at the fastest annual pace in six years in the June quarter of 2016. Overall lending continued to rise at a spookily consistent pace.

Squeezing the Balloon

When regulators cracked down on investment loans, owner-occupier lending boomed

Source: Australian Prudential Regulation Authority

It's the same with overseas buyers. In 2015, then-Treasurer Joe Hockey announced a crackdown on foreign purchases of real estate, amid fears a wave of non-resident Chinese were driving up prices. The states of New South Wales and Victoria, home to Sydney and Melbourne, followed suit last year, with fresh tax surcharges on foreign buyers.

It's made little difference: In the year through September, 25 percent of new-build properties in New South Wales and 16 percent in Victoria went to overseas buyers, with about 80 percent of them from China, according to a Credit Suisse Group AG report.

Indispensable Nation

China has by far the biggest share of foreign purchases of real estate in New South Wales

Source: Credit Suisse

The narrative that's taken hold -- of a country unable to stem rising prices due to the great wall of Chinese money bearing down on it -- sounds worrying, especially for the central bank. Reserve Bank of Australia Governor Philip Lowe would like to be able to kick-start the country's lackluster labor market with some monetary stimulus, but risks adding fuel to the fire of mortgage debt. On Tuesday, he held interest rates steady for the seventh month in succession.

Fortunately, that pessimistic analysis is largely fictitious. The tools for bursting Australia's property bubble are close to hand, and have been employed elsewhere. What's been lacking until recently has been political and institutional will.

Take Taiwan and Singapore. As wealthy, stable, Chinese-speaking states a few hours' flight from southern China, they might be expected to be suffering from the same bubbly dynamics visible in Sydney, Hong Kong or Shenzhen. 

Forever Bursting Bubbles

House prices have slumped in Taipei and Singapore, even as they've surged elsewhere

Source: Bank for International Settlements, Sinyi Realty

Note: Rebased. March 2011 = 100.

That's not the case. Homes prices in Singapore have fallen for 14 consecutive quarters, and a property-price index for Taipei was down 18 points in February from a high of 133 two years ago. As Gadfly's Andy Mukherjee wrote last month, things have gotten so cool in Singapore that the city-state last month announced plans to loosen some of the curbs it imposed on the market back in 2012 and 2013.

What have Taiwan and Singapore got that Australia doesn't? Truly draconian restrictions, for one thing. Taxes on Taiwanese property sales can reach as high as 45 percent, pushing the number of transactions last year to the lowest since 1991. Singaporeans who sell a property after less than a year must pay a 12 percent anti-flipping duty, and foreigners have to pay 15 percent when they make a purchase. Even Hong Kong is getting in on the act, raising transaction taxes for overseas buyers from 15 percent to 30 percent last November.

Australia was relatively late to the game with macroprudential measures, with the RBA for many years being notably skeptical of the potential of such curbs.

Off Target

Interest-only loans as a share of new Australian mortgage lending have been well above APRA's new 30 percent policy

Source: Australian Prudential Regulation Authority, Gadfly calculations

APRA's measures in 2014 to clamp down on investor loans started to change that picture, and the same agency is now pushing further. Last week, it told lenders to restrict interest-only loans to 30 percent of new business, compared to an average 40 percent over the past five years.

Whether those steps are sufficient to take the housing market off the boil is another matter -- but the answer isn't to give up on the possibility of regulation altogether. Authorities in Australia need to take a lesson from their counterparts in Asia, and seek better tools to bring property prices down to earth.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    David Fickling in Sydney at

    To contact the editor responsible for this story:
    Katrina Nicholas at

    Before it's here, it's on the Bloomberg Terminal.