There is growing concern amongst regulators in Australia with the monthly growth in property investor loans touching a one year high of 0.8% in December. This brings the annual rate to 6.2% although if the December rate is annualised it is more like 9%. This is an issue which has attracted top billing in Australia with banking regulators extremely concerned about rising prices in the Australian property market. So, is Australian property investor loan growth really a problem?
Buoyant property market in Australia
Cities such as Sydney and Melbourne have experienced significant growth in property prices in recent times. This was one of the main reasons why the Australian Prudential Regulation Authority (APRA) introduced a 10% cap on property investor loan growth back in 2014. This was effectively the simplest means of reducing the funding available to property investors across Australia and forced many banks to pull back from their aggressive marketing approach. This seemed to have an immediate effect on property investor loan growth which fell back to more manageable levels in 2016. However, a cut in Australian base rates in August last year undid much of this good work and demand began to rise yet again.
Is this the right approach by APRA?
There are very few people who would publicly support this type of approach in a capitalist market but in reality there was a very simple reason behind the limit. Property investor loan growth of 10% is way above average household income growth which is between 5% and 6% in the most favourable of conditions. Therefore, it is difficult to see how this growth in property investor loans could be maintained going forward without putting the Australian property market at serious risk.
Indeed some experts have gone as far as to suggest that the limit should be anywhere between 5% and 7% – in line with household income growth. This figure would potentially leave too little room for error which is perhaps why the APRA decided to go for the higher limit.
Boom and bust on the agenda again
There is no doubt that the Australian property market has performed admirably over the last decade. Indeed many people forget that Australia was one of the only Western countries not to dip into recession when the US mortgage market collapsed leading to a collapse in the worldwide economy. There are very few people who would argue property prices in Australia are “affordable” but we live in free market conditions and despite talk of a boom and bust scenario we have seen no significant pullback in prices as yet.
Whether we like it or not, regulators such as the APRA have an obligation to police markets and ensure they are functioning efficiently. Whether introducing limits is the right way forward has been debated time and time again but what else could they do at the time? Property investment loan growth was running too far ahead of economic growth and general household income. At some point, as we have seen in countries such as the UK and some parts of Australia, prices simply become unaffordable to the masses putting the property market at the beck and call of investors.