Australia's rapidly rising property prices are tipped to get a further shot in the arm if responsible lending laws are relaxed next month and buyers can potentially borrow more money, according to housing experts.
Treasurer Josh Frydenberg announced plans to unwind the responsible lending laws last September as a means to encourage the flow of loans and boost the economic recovery from the COVID-19 recession.
Winding back the lending laws would make it easier to get a home loan, potentially allow the average customer to borrow an extra $70,000, and speed up the home loan approval process, which had become onerous due to the forensic nature of the credit rules.
At the time of the Treasurer's announcement, house prices in most capital cities were showing little to no growth and reports had emerged of Australia having suffered its deepest economic contraction since the 1930s.
But by December, the Australian economy had bounced back, declaring itself technically out of recession, and national house prices leapt to record highs — by the end of 2020, the median house price in Sydney was an all-time peak of $1,211,488, Melbourne's at $936,073, Brisbane's at an unprecedented $738,000 and Canberra's at $855,530.
And they're tipped to keep rising through 2021. On Wednesday the Commonwealth Bank forecast an 8 per cent rise in the median house price over the year. Analysts say the relaxation of lending laws, slated for some time next month, will fan the flames further.
CoreLogic head of research Australia Eliza Owen said anything that enabled easier access to credit would push up house prices.
“Even an acceleration at the rate in which credit flows into housing purchases could have added housing demand and put upward pressure prices,” she said.
Ms Owen said the Treasurer's case for relaxed lending to help boost the economy was not as strong as last year when there was a lot of economic uncertainty.
“Even if you look at the Treasurer's language, it's about reducing the cost and access to credit,” Ms Owen said. “In terms of delivering the wealth effect through house price growth, that's not as much of a concern as when the Treasurer made the announcement.
“We know over the September quarter dwelling values came down 1.1 per cent and then by the December quarter dwelling values had risen 2.3 per cent.
“So, from September to December you had a turn in the housing market, which suggests delivering the wealth effect through faster credit isn't an issue right now.”
Domain's senior research analyst Nicola Powell said the relaxation of responsible lending laws would ultimately mean an easier and quicker flow of credit which, in the current rising market, would probably push prices higher.
“It is designed to encourage buyer demand and if we encourage buyer demand, that will help drive up property prices and boost economic growth, which is why the government wants to push this through,” Dr Powell said.
She said the new laws may not be enough to entice investors back, with parts of the rental market still highly disrupted.
Grattan Institute's program director of household finances, Brendan Coates, said credit regulation should not be used to help the real estate market.
“The case for responsible lending laws is irrespective of whether prices are going up or down. Responsible lending isn't really about the price cycle per se, it's not part of the tool kit to mitigate house prices,” Mr Coates said.
He said the responsible lending laws “probably do restrict who can borrow”.
“A lot of the time who you are restricting are first-home buyers who tend not to be the riskiest borrowers compared to highly leveraged investors,” he said.
“We have the macro-prudential tools to limit risky lending, such as capping growth in loans to investors or high loan-to-value ratio loans to avoid an explosion in house prices and flow onto financial instability.
EY Oceania chief economist Jo Masters said responsible lending laws had to strike the right balance of responsibility between a bank and the borrower.
“You want to set those lending standards for the right level of protection,” Ms Masters said. “You don't ease them when the economy is slow and tighten them when the economy is hot.
“When prices are rising and prices are really hot, you might get people who will over-leverage themselves as FOMO sets in, borrowing more than otherwise.
“Anytime you can borrow more, you're pushing more credit through the system, which increases the amount you can borrow, and pushes prices up.”
Mortgage Choice principal and broker James Algar said his office based on the northern beaches, one of the areas that recorded some of the strongest house price growth during the pandemic, had a 40 per cent increase in settlements compared to this time last year.
“I think it's easier to get a home loan now than it was a year ago. The challenge is the banks are massively overrun by applications,” Mr Algar said. “We've already seen the lending institutions take a slightly less inquisitive view on living expenses.”
He said while the sheer volume of applications had added to home-loan processing times, so too had responsible-lending obligations.
“If you remove that requirement it will make the process more efficient. Naturally, that will release more people out.
“That will undoubtedly put more pressure on the market. There will be more people in a position to buy more quickly and that in itself is basic economics. More people and no more properties.”
* Source - Domain.com - Tawar Razaghi