Panicked HIA joins push to corrupt lending standards

By Leith van Onselen

Last week, we reported that the major banks are lobbying APRA to lower its interest rate buffer, in a bid to raise borrowing capacity and support house prices:

ANZ chief executive Shayne Elliott urged the prudential regulator to scale back the buffer requiring new borrowers have the capacity to pay a 7.25 per cent interest rate, warning it was forcing the bank to turn away one in five loan applicants.

Mr Elliott supported a cut in the Reserve Bank’s record low 1.5 per cent cash rate at its pre-election board meeting on Tuesday next week, but warned that this might not stimulate the property market unless the servicing buffer also was lowered.

Yesterday, the Housing Industry Association (HIA) joined the chorus demanding cuts to the interest rate buffer, alongside reduction in stamp duties on foreign buyers:

“The contraction in the housing market over the past six months has occurred faster and is larger in scale than the contraction experienced after the GFC,” said Geordan Murray, HIA Senior Economist.

“This decline in industry activity has occurred in an environment when lending rates have remained relatively stable. Had the RBA lowered rates today it may have eased some of the pressures in the housing market, but the acceleration in the downturn in building activity during 2018 was largely due to regulatory imposts from state and Federal governments.

“Governments should be looking at measures to make home ownership more accessible to households, both as owner-occupiers and investors. “Removing the counter cyclical measures introduced at the peak of the housing cycle would be a good place to start.

“This includes reviewing the appropriateness of assessing loan serviceability against an interest rate of 7%, almost double the current market rate. Reversal of the punitive rates of stamp duty on foreign investors is also overdue. “These measures would assist in restoring the confidence in the housing market that was lost in 2018.

“The industry continues to complete work on existing projects but there are now fewer new projects getting underway. Approvals for the construction of new homes for the first three months of 2019 equates to an annualised level of home building of around 180,000 starts. This compares to 220,000 starts in 2018.

Unless there is an improvement in housing activity, employment conditions in the building sector will continue to ease during 2019.

The cash rate will be cut soon enough. If that doesn’t deliver house price stabilisation then APRA can maybe consider a small easing of the interest rate buffer, but even then not by much.

Trying to prevent a bubble bust created by some of the world’s worst lending standards by making them worse is self-evidently preposterous.

There are very good reasons to cut the cash rate and no good ones for APRA to cut, given it would:

  • encourage regulatory capture of APRA two months after the Hayne Royal Commision into regulatory capture;
  • hide monetary policy in the shadows where banks can control it;
  • give no relief to existing borrowers, which is needed;
  • send the Aussie dollar straight up if there was no RBA cut;
  • delay the much needed structural shift to non-mining tradables as households deleverage and mining declines with Chinese growth, and
  • materially cut into Budget revenues via a higher than forecast dollar that lowers nominal GDP offsetting the current commodity boom.

In a similar vein, there are few good arguments for slashing stamp duties on foreign buyers, given states are already facing collapsing stamp duty receipts. It would be far better to take the opportunity to replace stamp duties with a broad-based land tax, which are far less volatile and far more efficient.

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