The RBA released their minutes today. Whilst there is mention of housing, there is not definitive evidence in the minutes to explain the RBA’s recent shift in sentiment as contained in the recent Financial Stability Report.
Indicators of household consumption had been a little weaker than expected in early 2017. The value of retail sales had fallen slightly in February, following average growth in January, and households’ perceptions of their personal finances had declined to below-average levels. Retail price inflation had remained subdued, partly because competition had remained strong across the retail sector. Members noted that utilities prices were expected to put some upward pressure on retail costs, but that retail rents had been flat – or rising very marginally at most – across the major cities.
Conditions in the established housing market had continued to vary significantly by region. Housing price growth had been strongest in detached housing markets in Sydney and Melbourne and some indicators for the established housing markets in these cities had picked up in the preceding couple of months. In contrast, housing market conditions in Perth had remained weak, although there were signs that prices there may be stabilising. Vacancy rates had been increasing, particularly in Perth. Strong growth in the supply of new apartments was continuing to drive a wedge between price growth for apartments and detached houses in Melbourne and Brisbane. Private residential building approvals had rebounded in February; the large pipeline of work to be done was expected to support dwelling investment over the subsequent year or two.
Growth in housing credit to owner-occupiers had moderated slightly over the preceding six months, while growth in housing credit to investors had increased, although investor loan approvals had declined in February. Most of the increase in lending to investors had occurred in New South Wales and Victoria, which was consistent with the pattern of housing market activity. Members observed that the growth of housing credit to investors had initially moderated in response to the announcement by the Australian Prudential Regulation Authority (APRA) of a 10 per cent benchmark for investor credit growth in late 2014. In addition, the share of lending with high loan-to-valuation ratios had fallen. However, growth in investor credit had increased steadily since early 2016, despite the fact that banks had tightened lending standards and, on average, increased the margin between interest rates on investor housing loans and those on loans to owner-occupiers.
Risks related to household debt and the housing market more generally had increased over the preceding six months. However, the nature of those risks differed across the country, according to the varying conditions and activity in local markets. Although credit to the household sector had been growing modestly relative to history, growth had been faster than income growth and the aggregate debt-to-income ratio for households had increased.
Nevertheless, indicators of financial stress in the household sector remained contained. Low interest rates and improved lending standards over recent years had been supporting households’ ability to service debt, and households on average had continued to build repayment buffers. Members noted, however, that some households with home loans appeared to have little or no buffer of excess mortgage repayments and could be vulnerable if household income were lower than expected. This observation emphasised the importance of realistic assessments of household expenses and prudent lending standards for mitigating risks to both financial stability and macroeconomic outcomes.
Members discussed the recent actions taken by APRA and the Australian Securities and Investments Commission to support prudent lending practices. These actions had been focused particularly on interest-only lending, serviceability assessments and responsible lending practices. APRA’s guidance had included limits on the share of interest-only loans in new housing loans and a requirement that banks impose strict limits on new interest-only lending at high loan-to-valuation ratios. Members recognised that the calibration of this guidance was not precise or straightforward. Developments needed to be kept under review and, depending on how the system responds to the various measures, members noted that the Council of Financial Regulators would consider further measures if needed.
Members observed that a number of factors make interest-only loans attractive in the Australian context. In particular, interest-only loans allow investors to take greatest advantage of particular features of the tax system, while the availability of offset accounts provides some owner-occupiers with opportunities to manage liquidity risks that might be associated with irregular income, for example.
Members noted that some banks had curtailed lending to some segments of the housing market, notably the Brisbane apartment market, where the supply of apartments was expected to increase significantly, raising the risks associated with oversupply. Reports of settlement failures had remained isolated. Members also noted the higher interest rates facing most investors, especially those with interest-only loans.
Developments in commercial property markets mirrored the geographic pattern seen in residential property markets. Conditions had been strengthening in Sydney and Melbourne but were weaker elsewhere. Valuations were generally high, however, and posed some risk to leveraged investors if prices were to decline sharply. Members were briefed on APRA’s recent review of commercial property lending. This review revealed some instances of weak underwriting standards and poor monitoring of risk profiles among lenders; several Australian banks had since tightened their lending standards.
Members observed that, in contrast to the growing risks faced by the household sector, vulnerabilities in the non-financial business sector remained low. Outside Western Australia, business failure rates had declined. Profitability had been supported by higher earnings for resource-related firms, following the increase in commodity prices. Gearing ratios and other measures of the strength of businesses’ balance sheets had generally been around their historical averages.
Conditions in housing markets continued to vary considerably across the country. The established markets in Sydney and Melbourne appeared to have strengthened further, but housing prices had continued to fall in Perth. The additional supply of apartments scheduled to come on stream over the subsequent couple of years in the eastern capital cities was expected to put some downward pressure on growth in apartment prices and rents, particularly in Brisbane.
Growth in housing credit continued to outpace growth in household incomes, suggesting that the risks associated with the housing market and household balance sheets had been rising. Recently announced supervisory measures were designed to help mitigate these risks by reinforcing prudent lending standards and ensuring that loan serviceability was appropriate for current conditions. Less reliance on interest-only housing loans was also expected to increase the resilience of household balance sheets. However, it would take some time to assess fully the effects of the recent pricing changes and the increased supervisory attention.
