House prices to add another 20% if banks don’t slam the brakes

AMP Capital’s chief economist, Shane Oliver, is confident that following mega fast price gains in March, the fastest since the 1980s, the RBA and APRA could start taping the lending standards’ brake in the months ahead.

In a recent market outlook, the expert predicted that in the absence of intervention and given current conditions, property price growth could run for another 18 months with prices rising by a further 20 per cent or so.

As such, he sees both the RBA and APRA stepping in to cool the incline, especially as poor affordability starts to become a constraint.

“While they don’t target house prices, past experience indicates that surging house prices lead to a deterioration in lending standards and increasing financial stability risks, so it makes sense to start taping the lending standards’ brake soon,” Mr Oliver said.

Similarly, last week, CoreLogic’s Tim Lawless said a new round of macro-prudential policies is a matter of when, not if.

“While a new round of macro-prudential policies is looking increasingly a matter of when, not if, the catalyst for such a policy intervention is more likely to be based on a worsening in the quality of lending standards or increase in mortgage-related household debt rather than as a response to heat in the housing market,” Mr Lawless said.

“Tighter credit conditions would probably have an immediate dampening effect on housing market activity, while continuing to let record-low interest rates support the ongoing economic recovery,” he added.

But the level of dampening is now being questioned, following reports that New Zealand’s recent actions could cut price growth by as much as 20 per cent.

Namely, following the country’s announcement that it would move to curb house price growth, Goldman Sachs has suggested that the impacts could be fierce, subtracting about 0.5-1 percentage points from New Zealand’s GDP over the medium term.

As part of a broad package of measures aimed to curb house price growth – which is just shy of 25 per cent over a 12-month period – last month, the Ardern government said it would be removing the advantage investors have over first home buyers, including their ability to claim mortgage interest as a tax deduction against rental income.

“Cabinet has agreed to remove the ability for property investors to offset their interest expenses against their rental income when they are calculating their tax,” Revenue Minister David Parker said at the time.

This system is similar to Australia’s negative gearing policy, the abolishment of which was central to Labor’s federal election campaign in 2019. And although critics do see an integral link between negative gearing and a spike in house prices, the Morrison government is not expected to follow New Zealand’s lead just yet.

Speaking to Smart Property Investment, Diana Mousina, senior economist at AMP Capital, explained that although the situation in New Zealand has striking similarities to Australia, it does in its essence differ.

“Obviously, both have had very strong price growth since COVID peaked in both countries last year, or that period between March and May when we both had the worst economic performance, but New Zealand already had some LVR restrictions prior to COVID to try and deal with some of these pressures and issues in the housing market. In the pandemic, they removed these to try and support activity,” Ms Mousina said.

“In Australia, macro-prudential tools were used in 2017 and later removed, to slow down property price risks, especially around investor lending. So, the New Zealand situation is a bit more frothy, because they’ve had stronger house price growth,” she concluded.