Examining the role of leverage in house prices: Westpac

The CEO of the big bank pointed to “much lower” debt levels in the real estate market compared to previous price spikes when asked about the macroprudential tightening of lending standards.

Westpac chief Peter King made the observation during the House of Representatives Standing Committee on Economics hearing last week when committee chairman Tim Wilson asked him whether the macroprudential tightening of standards for loan could be applied in a way that does. are not a barrier for first-time buyers trying to enter the real estate market while avoiding “excessive borrowing”.

Wilson noted that the talks revolved around concerns about rising house prices and the need for tighter prudential regulations to avoid “overheating” the market and keep borrowers from over-stretching their finances.

However, Mr Wilson said: “One of the concerns I have about tighter prudential regulation is that you may find yourself in a situation where it favors the interests of capital or those who have existing capital and hurts first-time buyers who need to get a share of their income to borrow. “

He then asked Mr King: “Is there a way for Westpac to believe that prudential regulation can be tightened up if necessary, and (accepting that it may not be necessary at this time) where could it put an end to excessive borrowing or what might be considered excessive borrowing? for people who are modernizing their home rather than avoiding the risk of it becoming a barrier for first-time home buyers to enter the market? “

Addressing the need to tighten macroprudential standards, King said it was important to examine the role of leverage in influencing house prices.

He said that lending by lenders at a high loan-to-value ratio (LVR), the amount of interest-only loans, and the amount of investor loans, are three areas that act as powerful indicators of the effect. leverage.

“These three areas are way lower than what we saw during the last peak in house prices, and generally up a bit, but not too much in the past six to 12 months,” King said.

A recent Reserve Bank of Australia (RBA) analysis found that the share of high LVR loans increased in the second half of 2020, but remained low by historical standards (a trend corroborated by the analysis by CoreLogic of Australian Prudential Regulation Authority data).

The central bank attributed last year’s increase in homeowners to the larger share of first-time homebuyers, who it says have responded to government incentives such as the HomeBuilder program and the first-time deposit program. home loan, and falling interest rates, which have made buying a home more attractive than renting.

In addition, the share of interest-only loans remained stable at low levels, while the share of loans with high debt-to-income ratios increased in the second half of 2020 after earlier declines, according to the RBA.

Mr King also told the committee that lenders apply interest rate floors when calculating home loans to “prevent lower interest rates from being capitalized” and how much borrowers can borrow.

“It’s often something that’s seen in a macroprudential sense where you want to define it,” he said.

Mr King also said that the question of how to help first-time buyers to enter the real estate market was an important issue, and added that “getting people into the market is very important”, although it is not. did not explain how this could be facilitated.

Asked by Mr. Wilson if homes are gaining in value or if money is devalued, Mr. King replied that he thought homes were gaining in value.

Mr Wilson continued on this point, asking Mr King if he thinks homes are more valuable in an environment where immigration levels have stagnated due to border closures amid the coronavirus pandemic , and there has been “no change in laws to encourage investment in capital, while we have a devaluation of money”.

King responded by saying that one of the metrics he closely monitors is the ratio of new listings to real estate sales, adding that sales exceed new listings.

“We have excess demand from buyers for stocks in the market, and market prices lighten up when that happens,” he said.

“As I go out in the regions, whether it’s mainly New South Wales at the moment, the Riverina in New South Wales or central New South Wales, everyone I talk to tell me … there is a shortage of employees [where] they can’t find the people they need, and there are often housing issues as well, so I think we’re in a market where there isn’t a lot of turnover in the market.

“It’s pretty tight. Therefore, the rising stock is well up for grabs, ”he said, adding that the COVID-19 crisis has shifted the demand from buyers towards single-family homes and away from apartments.

Mr King said that in the long run, interest rate levels will drive asset prices in the economy, including house prices.

He concluded: “Over the longer term, asset values ​​will change with financing costs.

“And we’ve already seen interest rates in the longest part of the curve (10 years) go up. Obviously they won’t, in the short run of the curve up to three years with the policy of the RBA (Reserve Bank of Australia), but it will be a driver of asset prices in the economy, including prices longer term housing. . “

[Related: ‘No sustainable argument’ for RLO repeal: Donahoo]

Examining the role of leverage in house prices: Westpac


Last updated: April 20, 2021

Published: April 21, 2021

Malavika Santhebennur

Malavika Santhebennur is the Mortgage Securities Reporting Editor at Momentum Media.

Prior to joining the team in 2019, Malavika held positions at Money Management and Benchmark Media. She has been writing about financial services for six years.

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