Australia’s house prices are rising at their fastest pace in seven years, igniting fears of an emerging property bubble and prompting regulators to crack down on risky bank lending.
New figures on Monday show residential property prices have increased 12.9 per cent in the past 12 months, with prices in Sydney surging 18.9 per cent — the fastest rate of growth in almost 15 years.
“Four of Australia’s eight capital cities are now showing an annual growth rate in dwelling values higher than 10 per cent,” said Tim Lawless, head of research at Corelogic, a firm that tracks house prices.
He said the steep rise in house prices was fuelled by the Reserve Bank of Australia’s decision to cut interest rates twice last year to a record low of 1.5 per cent and a rebound in buy-to-let investor activity during the second half of 2016.
House prices in Sydney have more than doubled since the financial crisis hit in January 2009 while prices in Melbourne are up 92.4 per cent. This has occurred despite sluggish consumer price inflation, tepid rates of business investment and economic growth. Recent hopes of a rebound in consumer sentiment were dashed on Monday when retail sales fell 0.1 per cent, compared to economists’ forecasts for 0.3 per cent growth.
Surging house prices are a concern for global regulators as they seek to prevent the asset price bubbles in an era of ultra-low interest rates ushered in by the financial crisis in 2008. Regulators in Australia, Ireland, New Zealand and a host of other countries have introduced macroprudential rules in a bid to slow house price inflation.
In 2014 Australian regulators placed a 10 per cent limit on growth in new lending to investors, a move that initially slowed bank lending to the buy-to-let sector. But a recent increase in lending to investor prompted regulators on Friday to issue new rules limiting the flow of “interest only” mortgage lending by banks to 30 per cent of new loans issued.
About 40 per cent of new mortgages are issued on “interest only” terms, under which borrowers do not have to pay back the principal of the loan for a specific period.
The regulator also placed limits on the volume of “interest only” lending at loan-to-value ratios above 80 per cent and flagged closer scrutiny of lending at loan-to-value ratios above 90 per cent.
The RBA, which is due to meet on Tuesday, is expected to discuss the housing market, although no change to the 1.5 per cent official interest rate is expected by economists due to the need to support economic growth.
“We have a rapid and worrying rate of increase in house prices and debt but there is no law of gravity that suggests house prices must come down just because they went up,” said Saul Eslake, an economist and fellow of the University of Tasmania.
He said Australia did not have the same housing oversupply or unemployment levels that caused house price crashes in Spain and Ireland. However, he warned action should be taken by government to address the perverse incentives in the Australian tax system, which encouraged property speculation and increased market risks.
Australia’s system of “negative gearing” provides investors with a tax break allowing them to claim as losses the financing and other costs of their rental properties against other income. The tax break has become so popular that 15 per cent of the electorate have become buy-to-let investors.
Investor loans make up just over one-third of the A$1.49tn (US$1.13tn) residential property market, according to Australia’s prudential regulator.
The government of Prime Minister Malcolm Turnbull has defended “negative gearing”, warning that tampering with the incentive could reduce supply in the rental market. The opposition Labor party has outlined plans to reform the tax.
Follow Jamie Smyth on Twitter: @JamieSmythF
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