House boom lifts pressure for ‘speed limits’ on loans
FEARS of property bubbles have prompted a warning from one of the world’s pre-eminent financial regulators that using monetary policy to ward off dangerous dislocation in house prices is losing its clout, putting pressure on the Reserve Bank to consider “speed limits” on lending to cool the market.
As the weekend auction clearance rate in Sydney again topped 84 per cent, a study by the Switzerland-based Bank for International Settlements found central banks had increasingly used prudential rules to battle property market “booms and busts” instead of monetary policy.
This comes as the RBA’s record-low interest rates set up a potentially uncomfortable position for governor Glenn Stevens.
The RBA would not want to raise rates to soften property prices while the broader economy was weak and after the jobless rate last week hit a four-year high, analysts said.
In addition, higher rates would boost the Australian dollar, further straining the economy’s critical transition to non-mining sectors such as manufacturing, tourism and housing construction.
Led by a Sydney market that real estate agents say is “hot”, house prices are rising at an annualised rate of about 8 per cent as demand from investors floods tight supply.
In a bid to cool its booming property market, the Reserve Bank of New Zealand recently imposed macro prudential rules capping the lending banks can do at high loan-to-value ratios.
Canada, Sweden and Norway have also implemented LVR restrictions since the global financial crisis.
Economists say while the RBA has been opposed to macro prudential tools, the greater use of such rules by central banks globally may prompt a rethink if house price growth continues.
“Australian house valuations have recovered in the last 12 months, along with a rebound in consumer confidence metrics,” said John Buonaccorsi, a banking analyst at investment bank CIMB. “At the same time, business confidence remains weak, suggesting to us that low interest rates are still needed to support business investment. Against this background, NZ’s policies could prompt a rethink on using macro prudential tools in Australia.”
The BIS’s one-off study looked at policy actions on housing markets in 60 economies, including Australia, from January 1990 to June last year.
Monetary policy in terms of changes in rates is not included as it is already “well documented”, with the study focusing on three actions: reserve and liquidity requirements, and limits on credit growth. Five prudential measures were included.
While it found greater use of monetary policy actions overall, the share of prudential policy actions more than doubled to 33 per cent in the 2000s and 39 per cent from January 2010 to June 2012. In addition, the 13 economies in the Asia-Pacific region were the most active users of prudential measures.
“These findings are in line with the increasing interest of policymakers in prudential measures that specifically influence housing credit booms,” the report says.
“Since the 1990s, financial cycles such as housing credit and house price cycles have become longer, larger and less synchronised with business cycles and inflation cycles.”
The report concludes many central banks have adopted interest rate policy and inflation targeting as the main part of monetary policy framework since the 1990s. The RBA’s primary mandate is to set the cash rate to meet its inflation target of 2-3 per cent, but it is also charged with ensuring economic stability, in which housing markets play a big role.
BIS did not refer to Australia’s current property market, but the surge in prices has caught the eye of regulators. Last week, the Australian Prudential Regulation Authority warned banks not to relax home lending standards.