Sydney’s Housing Bubble Seen Surviving Tepid Loan Limits

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Australian regulators are flashing warnings. Banks are vowing to curb lending. And that may not be enough to damp runaway housing prices.

At the urging of the financial services watchdog, the nation’s biggest mortgage lenders, including National Australia Bank Ltd., plan to trim the growth in loans to investors who have been on a home-buying frenzy. Regulators may have to impose stricter measures like those in New Zealand to cool Sydney’s housing market, said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd.

“New Zealand’s approach has been lot more direct and tougher, whereas here it’s about having a chat with the banks and expecting changes,” Oliver said.

The Australian Prudential Regulation Authority in December asked lenders to limit the expansion of investor mortgages to 10 percent a year, warning that those breaching that level will face higher capital ratios. Such a slight reduction from the 10.4 percent growth in March, the most in seven years, may not restrain housing prices that have skyrocketed 40 percent in Sydney in three years, according to CoreLogic Inc.

Investor Frenzy

“It’s modest and I wouldn’t expect it to have implications,” said Ben Jarman, a Sydney-based senior economist at JPMorgan Chase & Co. “If they push investor credit lower instead of reinforcing the current rate, then that would be a different story.”

Lending to investors is near a record high. The proportion of home lending to speculators rose to 40.8 percent in March, just shy of the 40.9 percent record in December, according to government statistics.

“The level of risk in banks’ mortgage portfolios has risen over the past couple of years,” Reserve Bank of Australia Deputy Governor Philip Lowe said at a conference in Sydney on Wednesday. “When risk moves up, both financial institutions and households need to respond to that.”

RBA Dilemma

The surge in lending adds to the RBA dilemma. While it’s keeping interest rates down to stoke growth in a sluggish economy, policy makers don’t want to inflame the housing market. The central bank’s key lending rate is at a record low, and the average benchmark variable mortgage rates are at a five-decade low.

“The RBA is trying to tread a middle ground,” Jarman said. “They have been seeing positive signs in home building, which is helping economic growth a bit.”

National Australia and Westpac Banking Corp. in the past month said they expected growth in lending to landlords to decline in the September quarter. Australia & New Zealand Banking Group Ltd. and National Australia said they were doing away with interest-rate discounts on investor home loans.

‘Monitoring Closely’

APRA has agreed on plans with the banks to slow the pace of lending and will be “monitoring closely to see that they kick into effect,” Chairman Wayne Byres said on May 13.

Australia has been a laggard in the region in tackling surging home prices that have eroded affordability and helped make its citizens among the most indebted in the world. Households carry a record debt of 153.8 percent of income while wage growth languishes.

Hong Kong, Singapore and most recently New Zealand have introduced measures to deter housing speculators. New Zealand this month said it will require investors to provide a 30 percent down payment to get a mortgage on Auckland property, and will more rigorously enforce taxation of capital gains on investment properties and ensure non-residents are included in the tax net.

Holding Capital

Australian regulators should require lenders to hold more capital against investor mortgages, cut discounts on rates and raise down payments for investment properties, AMP’s Oliver said. These tools should target Sydney because house prices haven’t surged in some cities and lower rates are needed for other parts of the economy, he said.

Lenders have been reducing the risk weightings they assign to their mortgage books, lowering the amount of capital they need to set aside. A government review of the financial system in December recommended a 25 percent to 30 percent floor for the mortgage risk weight compared with the 18 percent average held by the four lenders.

“If APRA is right, it should mean house price gains in Sydney should start to moderate but the question is have they done enough?” Oliver said. “There is a lot riding on APRA now.”

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