The minutes released today included comments on the housing sector.
Dwelling investment had increased strongly over the year to June, despite recording a decline in the June quarter. Building approvals had declined a little from their recent peak, but remained at levels that implied further growth in dwelling investment, albeit at a gradually declining rate. Loan approvals for construction of new dwellings had also fallen over the past year. Growth in housing prices in Sydney appeared to have eased slightly in recent months and auction clearance rates in Sydney and Melbourne had declined a little from their recent peaks. However, it was too early to be confident that these signs of slowing in housing price inflation would be sustained.
In relation to lending for housing, members noted that the data on the split of lending to owner-occupiers and investors were of questionable quality at present. The available data suggested that there had been a modest decline in the growth of credit extended to investors in housing of late, which was consistent with the tightening in banks’ lending standards in response to actions of the Australian Prudential Regulation Authority (APRA). With housing credit growth overall remaining steady over the past year, there had reportedly been a slight pick-up in the growth of housing credit to owner-occupiers.
Comments on financial stability risks, highlight risks in the residential AND commercial property sector.
Global financial stability risks had been shifting from advanced country banking systems to China and other emerging market economies. Partly in reaction to this, financial market volatility had picked up following a lengthy period of low volatility and compressed risk premia. Members noted the possibility of a sharp repricing in markets where investors for years had been ‘searching for yield’.
Members noted that domestic sources of risk to financial stability in Australia continued to revolve mainly around developments in local property markets. In the context of recent developments in the housing market and household credit, members discussed the findings from the enhanced scrutiny of housing lending practices undertaken by APRA and the Australian Securities and Investments Commission since the end of 2014. This scrutiny and related work had shown that investor activity was considerably higher – and lending standards in some parts of the market weaker – than had originally been thought.
Members further observed that the risks in commercial property and the property development sector were rising. Building approvals for new apartments remained very strong over 2015, even though rental markets appeared soft in some areas. The divergence between commercial property valuations and rents had widened further, with strong domestic and foreign investor interest for new and existing office buildings in particular, even though vacancy rates were quite high. At the same time, falling commodity prices were weighing on the profitability of many resource-related companies. The rest of the business sector seemed to be in relatively good shape, in contrast, with both gearing and failure rates at relatively low levels.
Members were also briefed on the risks in the New Zealand housing market and dairy sector, given the sizeable exposures of Australian banks through their New Zealand subsidiaries.
While Australian banks continued to perform well, they were taking steps to enhance their resilience. Banks’ asset performance continued to improve, profitability remained high, and the large banks had raised substantial amounts of capital in advance of forthcoming prudential requirements. Most banks had strengthened the serviceability metrics used in their mortgage lending and taken steps to slow the pace of growth in investor lending towards the prudential regulator’s expectations. Banks were also reportedly becoming increasingly wary of lending to property developers in markets that were thought to be at risk of becoming oversupplied. Nonetheless, competition among lenders had intensified in the owner-occupied segment of the housing market and had continued to do so in parts of the business lending market. Members observed that a key challenge would be to ensure that lending standards at both Australian and foreign-owned banks did not weaken from this point.
So, no change to rates:
Members noted that reductions in the cash rate earlier in the year continued to provide support to aggregate demand, particularly dwelling investment and household consumption. Members also noted that conditions in the labour market had strengthened further over recent months and were somewhat better than had been expected earlier in the year. Nevertheless, spare capacity remained in the economy, domestic cost pressures were very low and inflation was expected to remain consistent with the target over the next one to two years.
The key domestic sources of risk to financial stability, and stability of the Australian economy more broadly, revolved around developments in local property markets. Members noted that growth in lending for housing had been steady over recent months and that there were some signs of an easing in the strong rate of increase in dwelling prices in Sydney, in particular, although trends had been more varied in a number of other cities. At the same time, members judged that there were signs that the response of the banks to supervisory measures implemented by APRA were helping to manage risks in the housing market. Credit growth overall had been moderate.
Given these considerations, the Board judged that it was appropriate to leave the cash rate unchanged at this meeting. Information about economic and financial developments, both domestically and abroad, would continue to inform the Board’s assessment of the outlook and whether the current stance of policy remained appropriate to foster sustainable growth and inflation consistent with the target.
