Runaway house prices is this year’s looming issue no one wants to touch

The sizzling hot housing market may be this year’s looming problem but doing something about it is something the government and regulators seem reluctant to engage with – yet.

And no one is prepared to use the ‘B’ word as a descriptor for the state of the market – even in the face of house prices experiencing a monthly rise in February not seen for 17 years.

House prices experienced a monthly rise in February not seen for 17 years.Credit:Peter Rae

The Reserve Bank chairman Philip Lowe told an Australian Financial Review business summit that he was essentially keeping an eye on the property market but that holding interest rates at their current historically low level was front and centre of his economic agenda.

He conceded that rising house prices that were accompanied by stagnant wage growth was not ideal.

For Lowe the issue of the housing market overheating is difficult to traverse given that uber low interest rates are the primary reason buyers have flooded into the market.

But he is not prepared to blunt the RBA’s monetary tools needed to support the economy in order to dampen the housing market.

(In addition, rising home values can support the economy by adding to the “wealth effect” that economists say promotes consumer spending.)

The RBA would rather hand over responsibility to deal with the hot housing market to the Australian Prudential Regulation Authority (APRA), which has sharper tools in its box of tricks.

The government doesn’t want to close down the property party – quite the opposite. It is barrelling ahead with plans to roll back responsible lending laws imposed during the global financial crisis and, depending on what kind of support it receives in the Senate, this may happen as early as next week.

Winding back these laws was proposed back in September as a means to facilitate credit growth. Since then credit growth in the housing market has bounced back so the rationale behind the policy now appears redundant.

RBA Governor Philip Lowe watches the sizzling property market from the sidelines.

The banks argue that there is no need for responsible lending laws because they can manage their own risk appetite. They say the responsible lending laws just manufacture red tape and add time to approving and processing loans.

Indeed, the banks are now enjoying the surge in home lending – which in the month of January was up 44 per cent on January last year. Although lending at rates that are as low or even lower than 2 per cent for owner occupiers doesn’t provide lenders with a lot of profitable margin, there is a clear willingness to supply credit.

With the government and the banks unwilling to tackle a potential property bubble, the notion that APRA will eventually need to take a more aggressive stance is gaining currency.

As UBS bank analyst Jonathan Mott told clients on Wednesday, APRA has traditionally dealt with individual banks to keep a tab on lending standards.

But the regulator did move to address the runaway housing market in 2014 by placing caps on lending to residential property investors and later it imposed caps on interest-only borrowing.

The targeted approach was both successful and politically benign.

This time around it is neither of these borrower groups that are pushing up the market. Investors have stayed on the sidelines thanks to poor rental returns. Meanwhile, banks have spent years weaning many borrowers off interest-only loans.

The current spike in borrowing is being fuelled by first home buyers, who are desperate to get a foothold in the property market and have been assisted by targeted government stimulus.

UBS considers it unlikely that many of the macroprudential measures used previously by APRA would be applied to first homeowners. This could in turn reduce the effectiveness of APRA’s arsenal.

In a broader sense regulators could seek to redeploy the mandating of interest rate buffers which banks apply to effectively stress test a borrower’s ability to service a loan in the event rates rise.

APRA could also follow the lead of New Zealand’s Reserve Bank which forced lenders to limit the amount they provide to borrowers with a higher loan to value ratio than 80 per cent. This means home buyers would need to have a larger deposit.

But at this stage APRA seems to have a watching brief on the housing market and see how it progresses as the last of the interest rate deferrals roll off at the end of March.

But if the growth in prices experienced in February remains at the same pace, the growth would represent a 24 per cent increase over a year. And everyone will be using the ‘B’ word.

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