Westpac has said that
moves to tighten lending standards could come earlier than it previously
predicted amid a stronger than expected surge in house prices.
The major bank has released its housing Pulse for May 2021, in which it said that it expects prudential policy to remain
unchanged in 2021.
However, it said that with house prices rising more strongly than
expected, "a move to tighten conditions now looks set to come through a bit
earlier than we previously thought, most likely in the first half of 2022”.
The upgrade in predictions has followed observations by Westpac of
the first "rumblings” of a shift in prudential policy.
In particular, the major bank noted that the Reserve Bank of
Australia (RBA) has shifted its rhetoric on housing in its monetary policy
It said: "Whereas in April we had a general comment, ‘lending
standards remain sound and it is important that they remain so in an environment
of rising housing prices and low-interest rates’, May indicated a clearer move
into ‘watching closely’ mode.”
Westpac quoted the RBA as saying in May that "given the
environment of rising housing prices and low-interest rates, the bank will be monitoring
trends in housing borrowing carefully, and it is important that lending
standards are maintained”.
Indeed, RBA governor Dr Philip Lowe reiterated this stance in his statement on
the central bank’s monetary policy decision for June, stating
that property prices have increased in all major markets and housing credit
growth has picked up.
He said: "Given the environment of rising housing prices and low-interest rates, the bank will be monitoring trends in housing borrowing
carefully and it is important that lending standards are maintained.”
The tightening would be gradual
Westpac said in its report, however, that if and when lending
standards are tightened, regulators would be gradual in their transition from
"watching to acting”.
The bank provided several reasons for this approach, including the
fact that all arms of policy is currently focusing on securing Australia’s
recovery from the COVID-19-driven recession in 2020.
"Both monetary and fiscal policy are firmly targeting strong,
above-trend growth to drive a return to full employment over the medium term,”
the report said.
"While the economy has sustained a strong rebound to date, much of
this strategy rests on maintaining current strong confidence, particularly in
the consumer space where continued robust gains in spending depend heavily on
consumers being prepared to lower savings and draw on the large reserves
accumulated over the last year. Prudential measures deployed too early could
clearly rattle that confidence.”
The major bank also noted that key metrics for aggregate risk
still have not met levels that would be of significant concern for regulators.
"On leverage, the aggregate household debt-to-income ratio is now
rising but on our estimates is still a touch below pre-COVID levels,” the
"Likewise, the pace of housing credit growth has lifted but
remains well below the 7.0 percent annualised pace that looked to be a key threshold
based on previous tightening episodes.”
It added that new finance approvals would need to rise a further
50.0 percent or more for annual housing credit to begin pushing towards 7.0
percent a year.
In addition, Westpac noted that data has shown few signs of an
increase in riskier activity to date, with data showing only a slight uptick in
the share of "high loan-to-value ratio (LVR)” loans, and little movement in the
share of non-standard loans.
Finally, the bank said that regulators expect lenders to
"self-regulate”, with the measures implemented between 2015 and2017, including
"micro-prudential” changes that it said has improved the consistency and
discipline lenders use to make borrowing capacity and serviceability
House prices to surge 15.0 percent in 2021: Westpac
Westpac said that it is expecting a 15.0 percent spike in house prices in 2021,
followed by a more subdued 5.0 percent rise in 2022.
These forecasts are "bring-forward” of its previous predictions,
which stated that prices would rise by a cumulative 20 percent over the two
years, it said.
Commenting on the house price forecasts,
Westpac senior economist Matthew Hassan said that affordability and
macro-prudential measures would slow the market from this point.
"Australia’s housing markets are fizzing. The broad-based lift
that was gathering three months ago is now a fully-fledged boom,” he said.
"Aside from the strength of price gains in recent months, the most
striking aspect has been the breadth of the upturn – most of the 90-odd
detailed sub-markets we track recording gains running at a double-digit
annualised growth pace and none recording declines.
"This is very rare in the history of Australian property cycles,
which more usually see a few markets ‘sit it out’ when prices are on the move.”
National turnover in the housing market is nearly 30.0 percent
above its pre-COVID-19 peak, and prices are 8.5 percent above their pre-COVID
highs, pushing new record levels in most markets, the report said.
While property listings across the wider market have been catching
up with sales levels, there is still a 15 percent to 20 percent gap
nationally, while stock on market is still 2.8 months of sales (the long-run
average is 3.8 months), the report said.
Article Source - https://www.mortgagebusiness.com.au/
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Wednesday, 2 June 2021