Housing high flyers move to macroprudential rules

By Leith van Onselen

Goldman Sachs last week released an interesting report (below) on the stark differences that have emerged across developed country housing markets. The report essentially seperates the preformance of various housing markets into two distinct categories:

  1. ‘housing high-flyers’:where real house prices have increased strongly and are up cumulatively since Q1 2009; and
  2. ‘housing low-lyers’: where the housing market downturn appears to be continuing.

The countries making up the two groups, and their differing performance, are shown in the below Goldmans charts:

Goldmans also attempt to identify the degree to which the surge in home values in the ‘high-flying’ countries presents risks to respective economies by assessing the change in real (inflation-adjusted values) over a 15-year time period, the divergence between house prices and rents, as well as the overall level of construction.

On the first point – the degree to which home prices have risen – Australia ranks fairly poorly, with Australia experiencing the equal third biggest price appreciation since 1997 (see below chart).

Australia also ranks fairly poorly when home prices are compared against rents, although the situation is improving owing to recent house price weakness and rising rents (see below chart).

However, Australia’s amemic rate of new home construction is a plus, according to Goldmans, with permit levels running below long-term averages (see below chart).

Goldmans notes that policy makers in the high-flying countries are in bind, with the desire to ease monetary policy in order to safeguard economic growth running the risk of fuelling further housing bubbles. Accordingly, more authorities are looking at macroprudential tools, such as loan-to-value (LTV) ratio limits, in order to temper housing-related excesses. Examples of programs being implemented in high-flyer countries include:

In Norway, the Financial Supervisory Authority (FSA) recommended a maximum prudential loan-to-value (LTV) ratio of 85% in December 2011, down from a 90% maximum (which was instituted in 2010), with a risk of higher capital charges for banks not meeting these guidelines.

In Sweden too, a maximum LTV of 85% was introduced in December 2010, and there is ongoing discussion about additional macroprudential regulation to be enshrined in legislation.

In Israel, only last week the MPC cut rates even as the Supervisor of Banks moved to tighten mortgage lending conditions by limiting the LTV ratio for housing loans to 70% from November onwards. This is a continuation of previous macroprudential measures by the Banking Supervision Department of the Bank of Israel (which included limiting the maximum floating rate component of housing loans to 33.3% in 2Q2011).

In Canada, regulators have followed primarily two approaches: ‘jawboning’ by the Bank of Canada (including the recent modest strengthening of the tightening bias in its October policy statement), and tightening the requirements for government mortgage insurance in at least three separate steps since 2010, most recently in summer this year. From July 2012, the CMHC (Canadian Mortgage and Housing Corporation), which insures about three-quarters of Canadian mortgages, has lowered the maximum LTV ratio to 80% for mortgage refinancing (from 85% in 2011), reduced the maximum amortisation period to 25 years from 30 years, and fixed maximum levels of debt-service ratios.

Even in the ‘housing high-flyers’ such as Germany, where valuation concerns appear less pressing as of now, plans are afoot to establish the framework for undertaking macroprudential policy in the future.

Australia’s reluctance to examine these types of measures casts serious doubts about claims that our financial sector regulation is world-beating. Given the over-valued currency is hitting the entire tradeable sector is also in part the result of high interest rates, examining macroprudential rules is fast becoming a question of national interest.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

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  1. Imposing loan to value limits has social equity implications-it raises the bar for those who are saving for a house and it favors those who got through the door whilst it was wide open.It also could have hard-to-forecast impacts on existing house values(ie boomer savings).It also risks CB credibilty in my view by dragging them in to a highly sensitive area socially(if the RBA is the authority involved). Flexing asset risk weightings to remove the strong incentive of banks to lend for housing is another way of tackling the problem-but is open to the same objections.It is not as easy as it sounds.

    • My guess would be that any monitoring/management regime put in place to oversee LVR could be ‘gamed’ and I would imagine state governments and the RE industry would would freak at the idea of the RBA being the organisation looking over it – and would probably push for some scope to push local variations.

      But I do think these things need to be looked at, and the current RBA policy of firing up housing construction through monetary policy is crazy – as well as having its own batch of societal equity implications.

    • I believe it is APRA who would bring about any change in LVR’s so the RBA would appear to be at arms length, even if it was the real instigator of change.
      I agree with all of your other assertions.
      In a country with a housing supply shortage it may not be the cleverest solution in the long term, and short term gains might be swamped later when the gates are re-opened. That’s what happened in Victoria when the Rudd FHOG increase overcame the stamp duty wall that the state government had in place for some years. That breach in the wall created a flood in 2009, but eventually it had to happen.

    • Does it raise the bar unfairly against non-current property owners? I’d suggest it’s the reverse! After all, those who ‘got through the door’ have to sell to someone, eventually, and if their buyers are now restricted, well prices have to fall or the tenure time is about to go from 7 years to 20!

      • Exactly! Ponzi finance relies on new entrants. If someone has a $25k deposit, a 95% LVR limit means they can buy a place for $500k (about median?). Make the LVR limit 80% and all of a sudden new entrants can only get a place for $125K, essentially taking them out of the market until houses come down or they can save another $75k!

        People who own places can trade to each other only for so long. Without new entrants prices simply have to drop. The ones that suffer are the ones that own already, not the ones waiting to buy.

    • Terry, they are not boomer savings, they are boomer windfalls. It’s a simple case of the younger generation being forced to fund their seniors’ retirement. Nobody would begrudge boomers keeping the amount that they actually earned and saved (plus an annual return of, say, 10% – to be generous). But that’s not what you’re talking about, I suspect. These savings are the fruits of highly destructive state-sponsored speculation. Please, let’s call them what they are.

      Case in point, my parents bought their home in 1972. They sacrificed a lot to hold on to that place over the years, through some very tough times (ie. a failed business venture). I have huge respect for their tenacity on this score.

      The property is now worth (conservatively) 100 times what they originally paid for it. Yes, they have made some improvements but as we all know, nearly all the value is in the land alone, which is unimproved. I accept that they are probably towards the extreme end of the spectrum (their suburb got re-rated in the 1990s), but how is this savings? If people haven’t actually saved anything, why should they get to live high on the hog and force the generations that follow to do the saving for them?

      Obviously I’d love my parents to live high on the hog, but I’m just using them as an example that I am familiar with. I’m sure that they are far from alone in their situation. We need to call this what it is.

      • They are not boomer savings, they are boomer windfalls. It’s a simple case of the younger generation being forced to fund their seniors’ retirement.


        The current Australian housing policy is blatant, daylight robbery type of inter-generation wealth transfer as you said. In addition, it is also forced wealth transfer from newcomers (young migrants) to old residents. I refuse to subscribe myself to this unfair policy.

    • Diogenes the CynicMEMBER

      LVRs of 80% sound too high. For macro prudential standards we should be targeting 60%, perhaps progressively but 80% means the margin o safety for megabank is too thin if property goes down 50+% like Ireland.

      • Have a look at my calculations above, setting an LVR limit at 80% from 95% decreases the amount someone can borrow substantially. For any given deposit it reduces the maximum borrow by about 75% and could easily bring houses back to fair value.

  2. Anyone notice a lot more advertising for property lately? I.e. new housing, investing seminars, etc.

    Would be a tough stat to get but would be interesting to see # of Ads vs sale #’s. ha!

  3. These type of reports are an interesting read for both shortage-deniers and shortage-understanders.

    In simple terms the shortage determines how many people miss-out, and credit determines at what price they miss-out. Imagine there was a place where a shortage could not be solved quickly for some reason – perhaps an earthquake. How could government limit the damage? Without more houses it cannot reduce the number of people missing-out. But by using some kind of test, a waiting list, and regulation, it could ensure that families achieve housing in the same order they would have and at the same price. This way the only damage would be that young families would each have to wait say a few years, but would get the same house at the same price they would have otherwise.
    By contrast our moronic system creates winners and losers. Young people are asked to take a huge gamble on interest rates and future earnings, and lazy boomers etc, reap an unearned windfall.

    • Your proposition seems exactly like the housing regime in Eastern Europe in a totalitarian state. People were waiting on a list for buying a home. The prices didn’t change.

      It is sad for people coming from failed totalitarian regime to see how lack of genuine competition and good regulations are driving the Australian (but not only) economy to something so much similar we all ran away from. And someone even proposes rules for housing, which are already proven wrong in the long socialist practice. Maybe this is because no one has even bothered to better understand the totalitarian regimes and how their so called economic mechanism worked and why and how it failed. The lack of knowledge is the main reason why people constantly repeat others mistakes.

      I am amazed how “Australia’s amemic rate of new home construction” could be a “plus, according to Goldman”. Wasn’t the affluence on the free market the best feature of capitalism and market economy? If we have lack of housing stock then the government has to ensure there should be more construction of houses at normal prices, because housing is a necessity, not a luxury. Transforming the housing to a financial tool for banksters’ and landlords’ profiting by sucking the nation is a political crime. But again Goldman Sacks considers our low construction activity and high housing prices as something good. Nothing has changed, only Goldman’s growing wealth and people’s lowering standard of living – higher debt, higher stress, higher utilities prices, less jobs, less savings, less predictable future, etc.

      • Your proposition seems exactly like the housing regime in Eastern Europe in a totalitarian state.
        You missed my point Lori I wasn’t proposing anything. I was explaining how a bad and otherwise unnecessary thing can actually help (as a temporary measure) while the real problem is solved later.

  4. Haven’t the government and RBA done a great job in maintaining stability during the greatest financial crisis since the Great Depression and its aftermath?

    When you look at any number of National macro measures like employment, unemployment, GDP, house prices, household wealth over the past 3 to 5 years what you see is incredible stability compared to most other wealthy economies.

    This is not to say that there haven’t been sectoral and personal hardships, but it could easily have been a lot worse on a national basis.

    • I continue to marvel at the number of commentators that use grossly overvalued and unproductive house/land prices as a positive measure of national macro health.

    • If “doing a good job” is dumb luck, I suppose you’re right.

      Australia, like Texas, is in the enviable position of having a large mining sector, which has insulated it from the worst of the GFC. So Texas, like Australia, is just Cadillacing along.

      Mining constitutes 9% of Australia’s GDP. It constitutes 11.4% of Texas’s.

      Without mining (predominately Oil & Gas extraction in Texas), Texas would be in a world of hurt. The size of the mining sector has almost tripled from 4.1% of GDP in 1999 to its current 11.4%. The majority of economic growth in Texas for the last decade has been from mining sector.

      I understand the same is true for Australia.

      Texas does have one huge advantage over Australia. The FIRE sector in Texas amounts to only 14%, compared to 20% in Australia. So the vampire squid we have wrapped around our face, sucking the life blood out of the economy, is much smaller than it is in Australia.

      • Yet Texas’ house prices and debt levels barely moved in the years leading-up to the GFC and the four years hence. You can credit that to its highly permissive urban planning system which has allowed land/housing supply to adjust to demand and kept land prices low.

  5. Local banks are already running these high LVRs anyway, which is a major contributing factor to current historically low mortgage credit growth, so WHY does it need more government macro-level manipulation? We need LESS government interference, not more!

    Get rid of stamp duty, replace with a broad based land tax and stop restricting land usage. (this is Australia after all, one of the least dense countries on the planet) let the FREE market do it’s job! Government needs to just get out of the way!!

    • The concern is that the banking sector has the slack to alter LVRs at it’s disposal which allows increased risk taking. Bank lending is beginning to creep back to pre GFC behaviour here in NZ. At least macroprudential intervention lowers their ceiling.

  6. The Patrician-you ask what a better approach might be.I think the problem will self correct over the next 5 years as growth slows quite sharply,unemploymnet rises and the AUD falls.House and land prices should-hopefully-revert to something more sensible esp. if supply side issues are tackled(fat chance?).I agree this approach has its risks but the problems around LVRs scare me more.

    Mcpaddy- I agree they are windfall ‘earnings”-but they are vital to maintaining a solvent economy.Nuking them would guarantee a severe recession.

    • Terry, you say

      1.”House and land prices should hopefully revert to something more sensible”

      then you say

      2. “..windfall ‘earnings”….are vital to maintaining a solvent economy”

      You can’t have it both ways.

    • Terry, are you saying that it’s a reasonable approach for BBs to say to those who follow them:

      Ummm, you know how we completely stuffed the economy by sucking far too much money into housing and away from productive activity? Well if we tried to fix that problem now, it would plunge all of us into recession, which would hurt all of us, you know. So we’d prefer it if you guys just wear all the pain for this, ok?

      It just doesn’t stack up. There is medicine to be taken. It will not taste good, but hopefully at the end of it we will have a balanced and productive economy that is fully weaned from its current dependence on deus ex machinae, be they mining booms or property windfalls. This cannot go on and there is no painless way to fix it. The pain must be shared by all.

  7. Mcpaddy- I entirely agree that the pain should be shared and I recognise the injustice that you point out.But there are no pretty solutions to house prices which are over- valued of 30% or so and the question is how to extract the economy from the mess that it is in, without causing a bigger mess. Boomer consumption is critical to the economy-as possibly is a belief by a lot of kids of boomers that they will inherit a nest egg.The primary risk facing the economy(in my view and leaving China to one side) is that boomer equity in investment properties is destroyed as prices fall too fast.
    Sure that will make houses cheaper-but they wont be more affordable if there aren’t enough jobs/income to pay the interest.

    • “Sure that will make houses cheaper-but they wont be more affordable if there aren’t enough jobs/income to pay the interest.”

      Isn’t that all part of a desirable productivity adjustment?

    • Full disclosure: From a personal perspective I would be far better off if this madness continues.

      But this is wrong. What about the poor sods whose parents will not leave them a nest egg? They are fast becoming a locked in underclass and neither major party is addressing their cause. Rather, both parties are actively trying as hard as they can to keep them exactly where they are. It’s a disgrace.

      The problem with maintaining the status quo is also that those who inherit the nest egg will not really understand the source of their bounty and no lesson will be learned. How long can the perpetual motion machine keep spinning?

      In the end there has to be a reckoning; it’s just a question of who pays. In my view there should not be a generation that avoids payment (thereby increasing the pain on other generations), especially the generation that set up the whole warped system. That consumption that you’re talking about is all built on an illusion: the credit-fuelled bubble that is preventing Australia from exiting its economic adolescence.

      • GunnamattaMEMBER

        We are getting closer to the nub of the issue here.

        The punters who arent in a position to expect something from mum and dad……and maybe the punters who will discover at some point that mum and dad owed more than they ‘had’

        We create a serious underclass issue if we tell an ensuing generation (whether they are the children of those who didnt capitalise on the great debt boom, or migrants) they have to pay for the debt load chalked up by their predecessors.

        And it is an issue which neither political party seemingly wants to touch yet.

      • I hope you don’t mind if I join in the discussion because I think it goes to the heart of Australia’s investment conundrum.

        In simplest terms I guess you could define a productive investment as one where a reasonable man could expect an inflation adjust positive return over the life time of the investment.

        For Australia, the recent past certainly suggests that Houses and Holes are the two most productive investments that every thinking Aussie should have.

        Mining (aka Holes) is one of the few areas where Australian industry has shown it self to be capable of really competing at an international level.

        From a Macro-economic level what else can Australia do?

        Australia’s large scale Manufacturing infrastructure is a joke, we lack the engineers especially production focused engineers. So while we might be able to design medical equipment we have no particular advantage in this area. Trust me I know I spent 5 years designing Medical diagnostic equipment and frankly I’d rate the capabilities at a company like Mindray Medical way above any equivalent organization in Australia. (Google Shenzhen Mindray). There might have been an opportunity back around the mid 90’s for Australia to become a medical powerhouse, but that window has closed.

        So what “productive investments” are really left for Australians?

        • I guess that reasonable man will likely get what other Western reasonable men are getting – lower wages. Productivity is, after all, a much a function of input as output.

        • But China-Bob, isn’t it the case that we have to come up with some? Should we just shrug our shoulders and say “too hard”? Here are some thoughts off the top of my head:
          – We have a big wool industry and some natural advantage in that regard. What about technology around wool? There will always be a market for high end fabric.
          – Software localisation. Like Ireland, we are a native English speaking nation on the outskirts of a massive multi-lingual market. We can easily pull in and assimilate (we have already) large numbers of native speakers of all major Asian languages. Why not use this endowment to develop a significant software-linked services hub, as Ireland has done?
          – Minerals processing. For the life of me I cannot understand how it can make sense to ship TONNES of material 1000s of kilometres so that someone else can extract all the value from it. Again, this would bring to bear science and manufacturing industries – value add. Yes, we have cost problems compared to some places, but if we target the higher end of the value chain, those should not be an insurmountable obstacle.

          This is not impossible. Virtually every developed country in the world has gone through this process and we need to as well or we will fall into even deeper irrelevancy and, eventually, poverty. Argentina, anyone?

          • China-Bob, I think medical devices is a pretty good example of the kind of thing that we should not do, by the way. What is our natural advantage? I think it’s pretty amazing that we’ve had any success there at all and if we have it’s a real tribute to those involved. Unless there’s some kind of natural advantage, we will be smoked. We’re too small to outmuscle foreign competitors with bigger home markets and cheaper costs. We’re not smarter than them. We don’t work harder than them. But we can focus our energies in places where we naturally occupy the high ground.

          • I’d love to help but I don’t honestly believe that the patient (Australia) is ready to take the required medicine.

            The hollowing out of Australia’s economy does not affect everyone equally so most of the populace says things are going along quite well. Money is coming in money is going out. What is there to complain about?

            Take for instance Australia’s education system. There is absolutely no commitment to develop a technically skilled workforce. Sure there are “white papers” but are these matched with investments in Engineering schools and increasing graduates?

            If we are planning for the next 30 to 50 years, then technical skills are one of the few things that a society can actually invest in. Specific projects regardless of how well planned will probably never be profitable. Truth is you have to trust in the skills of the next generation and invest in developing these skills.

            In this sense the boomer generation has short changed the gen X, gen Yer’s. We (yes I’m a boomer) have produced an under-skilled labor force.

            Think of it this way, if the average Australian engineering wage had kept pace with the Average Chinese engineers wage (over the last 20 years) would Australia have a housing affordability problem? The real estate might still be very expensive but wages would be unbelievable.

          • GunnamattaMEMBER

            Its amazing in some ways.

            Anyone who went to University in the late 1970s or 1980s will have heard exactly the same sentiment about being a producer of raw goods and the stupidity of not adding value to it here.

            Keating and Hawke banged on about it, lecturers ranted about it and students went away nodding.

            But sometime between then and now we collectively decided that unprocessed and no value added was the way to go – for everything.

          • I’ve made this comment before, but I actually think that the problem is that we are under the delusion that the free market will solve this problem for us. So far, we’ve been lucky enough to have good living standards with very little effort. That won’t last, I think we’re agreed (at least on this site full of doom mongers). I think we need to recognise that we are in fact a very small/marginal nation and unless we pick and support some targeted, sustainable, advanced industries we will NEVER compete in any meaningful manner outside of primary production (which is generally of the slash and burn variety – inherently finite). A bit of a come down for the nation, but I predict we’ll be forced to do this within 50 years when it becomes obvious to the public at large it’s the only way forward for us. We’re a long way from that place right now.

          • i travel quite regularly to Taiwan., so i have an opportunity to see a country of similar population to Australia with a similar living standard.

            what amazes me is the depth of understanding, within the general Taiwan populace, regarding the need to be internationally competitive. Even the average Taxi driver understands that his/her wages are indirectly paid by the local industries.

            In 1987 Australia had a hightech semicoductor wafer-fab (AWA microelectronics) and Taiwan had absolutely no semiconductor industry, but saw the necessity to master this technology. Today Australia ha absolutely no semiconductor processing capability yet about 1/4 of the worlds fabs are located in Taiwan.

            These fabs cost in excess of $1B each (actually about 54B each these days). The industry required comparatively little direct gov’t investment, what it really needed was commitment and jnot just from politicians but rather from the average people. The average Taiwan family had to push their kids to develop the technical skills needed to support this industry. This means everything from semiconductor experts to fine mechanical tool makers and a commitment to support this industry with workers (with suitable wage structure)

            Australians lack this singular focus, money magically appears, to this day most Australians cannot even guess the correct magnitude of their major exports. You’ll hear things like is it Billion of Tonnes of Ore or millions of tonnes that we export. IMHO it is this degree of disconnectedness that is the underlying problem.

        • C-B,

          I fear we may have different understanding of “productivity”.

          You refer to “Houses” being one of the 2 most productive investments of the recent past.

          Exponential growth in house/land prices may have been productive for your personal wealth but that same rocketing cost of land is an ongoing drain on the productive capacity of this nation.

          Productivity ~ output/costs of production

          A cost common to nearly all production is the cost of land. A return to long term averages of the cost of land on international measures will raise the productivity of all.

          • T-P,
            Productivity is definitely a difficult thing to measure. A manufacturer might measure units of output / units of labor. But that measure has little meaning for an advanced economy. Think along the lines of, Is Facebook productive?

            Personally, I’d rather measure the net change in assets controlled by Australians (especially over a longer time frame).

            With this definition in mind, over the last 20 years Australia has developed a hundreds of millions of tonnes of new mining capacity and has built a lot of houses. These are probably the only net positive changes in the economy. There are also huge negatives to subtract from these meager gains (loss of a car manufacturing industry, loss of a high tech capability, not to mention opportunity costs lost)

            The net change in these assets is the net product of Australia. If you must you can divide this by 2000 (working hrs/year) * working population and get a more traditional productivity figure.

            I also find it difficult to understand why a house in western Sydney is worth considerably more then an equivalent sized house in say Plano (outer suburb of Dallas). The style and quality of construction is similar (possibly slightly higher quality for the Plano model due to better insulation and double glazing etc) Both are featureless landscapes with long commutes into the city. Yet the Australian model sells for about 2 to 3 times the average Plano house price. But I have to accept that otherwise sensible people are willing paying this much for a house, so it must be worth it!

            If the last 20 years are any indicator of the direction in which the Australian economy is headed then it would be difficult to advise against housing as an investment, the only argument you really have is (mean reversion). Yet by this same argument (mean reversion) Australia should now be starting to build TV’s, or ramping up its automobile capacity. Clearly neither of these things is going to happen. So possibly the average Australian has already found their optimal investment namely Housing.

            It’s the economists with their outdated measures of Productivity that need to wake up and smell the coffee.

          • C-B,

            It appears we disagree on more than just our understanding of the term “productivity”.

            Good luck

    • Terry, your comment is typical selfish hope of the BB generation who has controlled most of the prime real property assets in Australia. For your information, not all of the younger generation would be lucky to inherit those assets from their parents. How about the unlucky ones like new young migrants who has worked hard and paid taxes but were ignored basic opportunity to have decent home ?

      Sure that will make houses cheaper-but they wont be more affordable if there aren’t enough jobs/income to pay the interest.>

      I’d rather to gamble and maybe I’m lucky enough to keep my job and have a real chance to get affordable home rather than current situation when you worked hard, paid taxes and yet has no chance to get affordable, decent housing. And some us have saved “lots” of cash, maybe we’re lucky enough to buy debt-free.

      • Can’t help but notice that it does always seem to be the main beneficiaries of the status quo who say, “Be careful what you wish for.”

  8. Does Terry also factor in that of the 60% odd of property ‘owners’, less than half of them are mortgage free? So anyone ‘locked in’ by the current LVR ratios has to abide by the new ratios when they want/need to move on. In essence we would only see ~20% of the population ‘advantaged’ by past favourably higher LVR’s, and that only to the extent that they could either hold the property to probate, or swap with their contemporaries.