Sometimes ALL the signs point one way. And this week, that’s the way it looks for property.
It’s not often the International Monetary Fund (IMF) even notices what’s going on in our patch. So when this august body calls on government regulators to introduce new measures to reduce the risk of people falling into mortgage stress and suggests they take the heat out of the Sydney and Melbourne property markets, you should take notice.
There is more: today, The Financial Review points out that loans that amount to six times earnings have soared almost 20 per cent, gearing mainly younger lenders leveraging their first home.
And The Daily Telegraph reports that more than one in five homebuyers are borrowing more than six times their income.
Josh Frydenberg has met with financial regulators to discuss the hot housing market, and has given them the go-ahead to consider clamping down on high-debt home loans. And the new rules, expected to hit young house buyers hardest, will be with us in weeks.
The IMF is urging Australian regulators to cool the property market by tightening restrictions, increasing home construction, and reforming property-related tax concessions.
But that’s not what will happen.
Two market forces rule the property market: the availability of money and the availability of property.
There will be plenty of property on the market when prices are high and buyers are cashed up. Remove one or the other, and the market will change.
House prices have increased by 15.8 percent since the start of the year. That’s the highest increase in 32 years.
But wages are only increasing 1.7 percent annually. The average mortgage has increased by around $200,000 in NSW over the last 24 months and is also increasing in Melbourne. So where is the money coming from.
When Matt Comyn, boss of the Commonwealth Bank, the country’s biggest lender, says he is concerned about mortgage stress, that means there is plenty to worry about.
IMF Australia mission chief Harald Finger said that a comprehensive policy response was needed to deal with the booming property market.
He said; “the booming property market is exposing vulnerabilities in the financial system and making it harder for people to buy a home.”
Mr Finger called for debt-income ratio or loan-to-value ratio caps on mortgage lending and said that planning reforms could improve housing supply and affordability.”
Increasing the number of homes in Sydney and Melbourne would improve supply and take some of the heat out of the property market so that prices would fall.
CoreLogic released data earlier this month which revealed that Sydney property prices have climbed by 20.9% over the last year. Residential property prices in Melbourne have risen 13.1 percent whilst Brisbane property prices have jumped 18.3 percent.
Australian property regulators are concerned about household debt and are worried that the broader economy and banking system is at risk if property prices drop or borrowers lose their job.
According to data released in July by market research firm, Roy Morgan, one in six mortgage holders are at risk of not being able to pay their mortgage. Of those at risk of not being able to pay their mortgage, more than half (440,000) are extremely at risk. This is down from 480,000 who were considered extremely at risk for the same period in 2020.
CEO of Roy Morgan, Michele Levine said: “The level of support provided via government programs such as JobKeeper and the increased JobSeeker payment, as well as the mortgage holidays provided to mortgage holders by banking and financial institutions are still providing a dividend to those hit hardest by COVID-19 and have helped power employment to record highs midway through 2021.”
Roy Morgan estimates for June show that full-time employment has grown for a record eighth straight month to a record high of over 8.8 million, while the strong rebound of the economy is demonstrated by the ABS GDP figures for the year to March 2021, showing the economy grew by 1.1% despite last year’s deep recession.
Despite the strong job market, the IMF is also concerned that once temporary support payments for businesses cease more businesses will fail and that could lead to job losses, which would harm people’s ability to service their mortgages.
The IMF said that underlying inflation would increase to 2 percent by the end of next year and was on track to remain within the RBA’s target of 2-3 percent.
That would trigger the RBA to increase interest rates ahead of their guidance of not doing so until 2024.
The RBA was concerned that low borrowing rates combined with increasing property prices may endanger financial stability.
RBA assistant governor Michelle Bullock said that the risk to financial stability could be increasing.
“A high level of debt could pose risks to the economy in the event of a shock to household incomes or a sharp decline in housing prices.
“It is these macro-financial risks that warrant close watching. Whether or not there is need to consider macro-prudential tools to address these risks is something we are continually assessing,” she said.
The IMF issued a statement saying: “Lending standards should be monitored closely and macro-prudential measures should be employed to address risks. Options include increasing interest serviceability buffers and instituting portfolio restrictions on debt-to-income and loan-to-value ratios.”
The main message was that due to economic risks as we near the tail end of the pandemic, now is not the time for people to purchase a property. They should wait for the economy to rebound and would be better investing their money in term deposits, shares, ETFs, or cash until the economy rebounds and property prices come down enough to reduce the risk of mortgage stress.