Tara Perkins, The Globe and Mail,
Australia’s financial authorities are expected to impose new rules on that country’s mortgage system soon, in an attempt to take some steam out of the housing market.
Their deliberations about what to do reinforce the fact that Canada is not alone when it comes to concerns about overvalued house prices; a lengthy period of low interest rates has exacerbated the situation in many places.
But the situation also highlights a key difference between how Australian and Canadian officials have been weighing what to do: Australian authorities are working with more information.
One of the first inklings that Australia was considering a mortgage crackdown came from the central bank’s Financial Stability Review paper last month (you can read it here, and some more recent comments are made towards the end of this speech a few days ago). The paper said that Australia’s central bank, banking regulator and other financial authorities have been discussing “further steps to reinforce sound lending practices, particularly for lending to investors.”
The paper laid out the rationale for these discussions. “The composition of housing and mortgage markets is becoming unbalanced,” it said. “This has been most evident in the current strength of investor activity in the housing market, and in its concentration in Sydney and Melbourne.”
It would be hard for Canadian authorities to make a similar statement – we don’t have solid statistics on investor activity in this country’s residential real estate market. (Canada Mortgage and Housing Corp. recently attempted to get a handle on some of the investment activity in Toronto and Vancouver’s condo markets. Its survey was a good start, but had deficiencies, and there is much more to be studied.)
Australian authorities have determined that it’s investors who are driving up that country’s housing market, while “the momentum in the owner-occupier market appears to have slowed over the past six months or so.”
“Investor housing loan approvals are almost 90 per cent higher in New South Wales than they were two years ago and are 50 per cent higher over the same period in Victoria,” the central bank said. Investor housing credit is now growing at its fastest pace since late 2007, it added.
(It is worth pointing out that there are numerous differences between the Australian and Canadian housing markets, including the types of mortgages that are available and tax laws on investment properties. There are a number of ways in which Canada’s housing regulations are ahead of Australia’s, and some of Australia’s superior statistics are collected because of certain rules that exist there and not here. But we still have a long way to go when it comes to gathering information about our housing market.)
In Australia, “housing finance data show that the proportion of new mortgages going to investors has increased from slightly above 30 per cent in the middle of last year to close to 40 per cent, while the share of mortgages for first-time buyers slipped during the same period to less than 10 per cent from 16 per cent,” Nomura Securities’ Charles St-Arnaud wrote in a recent research report.
Mr. St-Arnaud notes that Australian house prices have increased by about 7.2 per cent per year on average in recent years. He expects that the most likely measures being studied are capping the loan-to-value ratio, forcing banks to hold more capital on their balance sheets when they make home loans, or making banks test to see whether potential borrowers could afford their mortgages at higher rates as a condition of approving the loans (something that Canadian authorities have done for variable-rate and shorter-term mortgages).
Australia’s central bank governor, Glenn Stevens, has been taking some heat because just about a month before it became known that he and other authorities were studying possible rule changes he derided such measures as “the latest fad internationally” (you can see a transcript of his comments here).
The U.K., New Zealand, Sweden, and, of course, Canada, are among the countries that have been experimenting with new rules. Former finance minister Jim Flaherty tightened the rules about which loans are eligible for mortgage insurance four times after the financial crisis. Current Finance Minister Joe Oliver has shown less enthusiasm for tightening the mortgage market, but has not ruled further action out if it becomes necessary, which policy makers here suggest it’s not at the moment.