23 Jan 2014
Will the RBA follow RBNZ steps on LVR restrictions?
FXstreet.com (Bali) - A submission from ANZ is warning about the negative consequences of rising housing prices in Australia, outlining the big challenges faced by regulators in its supervision of financial products.
According to Clancy Yeates, Banking reporter at the Sydney Morning Herald, "ANZ is urging the corporate regulator to be aware of looming risks in the property market, highlighting the potential dangers of geared real estate investment by self-managed super funds; With SMSFs holding $80 billion in property assets, ANZ identified borrowing to invest in property by DIY funds as one source of risk."
According to ANZ: "Gearing clearly increases returns in a positive market but gives rise to greater risks in the event of a market downturn. As a consequence, it may not be an appropriate investment structure for those close to retirement. Compounding interest may result in depletion of the consumer's equity at an accelerating rate. Future requirements for funding aged care or surviving spouse may be affected by loss of equity," ANZ added.
The Reserve Bank of Australia has so far played down risks in this industry, although in the minutes of the last RBA meeting the following observation was made: “Housing prices had increased at an annualised rate of 15 per cent over the past six months."
As Michael Pascoe, one of Australia's most respected finance and economics said, "Central bankers don’t dig out a figure and annualise it unless they are thinking hard about it."
Pascoe adds: "The Kiwis presently have that problem – economic growth of about 2.5 per cent but housing prices setting records. New Zealand’s central bank has responded by ruling that no bank can have more than 10 per cent of its housing book exposed to loans with a loan-to-valuation ratio (LVR) of more than 80 per cent. In other words, 90 per cent of kiwi bank loans have to be to people with at least 20 per cent equity – they can’t finance very many highly-leveraged speculators."
Back in December, when RBA governor Glenn Stevens had to testify before an Australian committee, to the question from chair Kelly O’Dwyer of possible application of “unconventional” methods employed by the RBNZ to cool down housing prices, Stevens said “unconventional” was increasingly conventional, adding the regulatory tools was an area to consider, although he had certain skepticism they were silver bullets, despite note ruling out that it is an area that will be evaluated as time goes by.
Pascoe concludes that "my suspicion is that the RBA would like to have other weapons to fight asset price bubbles when they occur, but is wary of getting involved in something that doesn’t work. Stevens made the point that first home buyers tend to be the most leveraged, and thus could be hit particularly hard by something like New Zealand’s 80/10 rule. And, as Stevens said, such things aren’t silver bullets. Despite the kiwi regulatory controls, record prices are still being set for New Zealand houses."
According to Clancy Yeates, Banking reporter at the Sydney Morning Herald, "ANZ is urging the corporate regulator to be aware of looming risks in the property market, highlighting the potential dangers of geared real estate investment by self-managed super funds; With SMSFs holding $80 billion in property assets, ANZ identified borrowing to invest in property by DIY funds as one source of risk."
According to ANZ: "Gearing clearly increases returns in a positive market but gives rise to greater risks in the event of a market downturn. As a consequence, it may not be an appropriate investment structure for those close to retirement. Compounding interest may result in depletion of the consumer's equity at an accelerating rate. Future requirements for funding aged care or surviving spouse may be affected by loss of equity," ANZ added.
The Reserve Bank of Australia has so far played down risks in this industry, although in the minutes of the last RBA meeting the following observation was made: “Housing prices had increased at an annualised rate of 15 per cent over the past six months."
As Michael Pascoe, one of Australia's most respected finance and economics said, "Central bankers don’t dig out a figure and annualise it unless they are thinking hard about it."
Pascoe adds: "The Kiwis presently have that problem – economic growth of about 2.5 per cent but housing prices setting records. New Zealand’s central bank has responded by ruling that no bank can have more than 10 per cent of its housing book exposed to loans with a loan-to-valuation ratio (LVR) of more than 80 per cent. In other words, 90 per cent of kiwi bank loans have to be to people with at least 20 per cent equity – they can’t finance very many highly-leveraged speculators."
Back in December, when RBA governor Glenn Stevens had to testify before an Australian committee, to the question from chair Kelly O’Dwyer of possible application of “unconventional” methods employed by the RBNZ to cool down housing prices, Stevens said “unconventional” was increasingly conventional, adding the regulatory tools was an area to consider, although he had certain skepticism they were silver bullets, despite note ruling out that it is an area that will be evaluated as time goes by.
Pascoe concludes that "my suspicion is that the RBA would like to have other weapons to fight asset price bubbles when they occur, but is wary of getting involved in something that doesn’t work. Stevens made the point that first home buyers tend to be the most leveraged, and thus could be hit particularly hard by something like New Zealand’s 80/10 rule. And, as Stevens said, such things aren’t silver bullets. Despite the kiwi regulatory controls, record prices are still being set for New Zealand houses."