The International Monetary Fund (IMF) has released its annual Article IV report on Australia, which calls for action to rein-in the runaway property market:
Surging housing prices raise concerns about affordability and financial stability. Structural reforms to boost housing supply and targeted support for low-income households are needed to improve housing affordability. Macroprudential policy should be tightened and lending standards closely monitored…
Macroprudential policy should be tightened to address gradually rising financial stability risks. While the surge in housing prices has been driven largely by owner-occupiers taking advantage of low mortgage rates and fiscal support programs, high debt-to-income mortgages are on the rise amid elevated household debt, and investor demand has begun to increase from low levels. Lending standards should be monitored closely, and macroprudential measures should be employed to address incipient risks. Options include increasing interest serviceability buffers and instituting portfolio restrictions on debt-to-income and loan-to-value ratios…
As I noted on Friday, Australia’s biggest mortgage lender – CBA – has already taken action to mitigate risks by lifting its benchmark floor rate to 5.25% from 5.10%, thus setting a borrowers’ capacity to repay a mortgage at a higher rate.
The bigger question why the Australian Prudential Regulatory Authority (APRA) has failed to act? As noted by the RBA last week, debt-to-income ratios have increased sharply, meaning a significant share of borrowers are over-extending themselves:
Why won’t APRA take preventative action now before the problem gets worse? What is the benefit in waiting?
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