Thursday, September 26, 2013

Get set. Be careful. House prices are taking off

And the Reserve Bank is frightened

The Reserve Bank has pleaded with home buyers to be “realistic” and told banks to maintain standards amid signs of a takeoff in Sydney and Melbourne real estate prices.

RP Data says Sydney prices have surged 8.6 per cent so far this year and Melbourne prices 5.3 per cent. In just the past three months Sydney prices have climbed 5.4 per cent and Melbourne prices 4.8 per cent. If continued, the pace will ensure double digit price rises in the year ahead.

Sydney clearance auction houses are reporting clearance rates of approaching 90 per cent; Melbourne auction houses, 80 per cent.

The Bank’s Financial Stability Report released Wednesday draws attention to reports of Sydney sale prices “exceeding price guidance and valuations by wide margins”.

“An increase in housing market activity more generally is not surprising given reductions in interest rates,” the Bank says.

“However, it is important that those purchasing property maintain realistic expectations of future dwelling price growth.”

Adding to the Reserve Bank’s concern is an explosion in property investment by self-managed superannuation funds which now account for one-third of all super funds, up from 9 per cent two decades ago. Since 2007 self-managed funds have been able to borrow to invest in property.

The Bank says self-managed funds are a “new source of demand that could potentially exacerbate property price cycles”. It is also concerned that the owners of the funds may be “exposed to greater financial risks than they envisage”.

The boom in property investment appears to be “particularly sharp” in NSW, the report says. “Investor housing loan approvals now account for around 40 per cent of the value of loan approvals in the state, a share last recorded in 2004,” the Bank says.

The interest-only share of home loan approvals “appears high” at around 40 per cent...

The Bank is concerned that investors have drawn the wrong lessons from the previous ramp up in prices in the lead up to the global financial crisis. At those times “prices grew rapidly in response to disinflation and financial deregulation”. The bank says neither of those conditions are present at the moment. “Long-run future growth in dwelling prices might be expected to be more in line with income growth” it says, warning that prices might not climb as high as the new investors believe.

Figures released separately by the mortgage monitoring firm RateCity on Wednesday show that an extraordinary three quarters of all loans now require only paper-thin deposits of 5 per cent, up from one half three years ago.

RateCity chief executive Alex Parsons said some of the loans on offer now require no deposit whatsoever.

“Lenders are loosening the belt on home loan criteria, meaning many more potential borrowers are eligible for loans that may not have been approved in the past,” he said.

“There’s an obvious temptation to jump into the market if an institution will lend you 95 per cent of the property’s value. But it means any increase in interest rates, or a reduction in your income, will have a much bigger impact.”

The Reserve Bank report calls on lenders to maintain “prudent risk appetite and lending standards, especially in the current low interest rate environment.”

The Reserve Bank of New Zealand will require New Zealand banks to restrict low deposit mortgages just 10 per cent of their portfolios from October 1.

In The Age

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