Monthly growth in property investor loans touched a one-year high of 0.8% in December, according to the latest figures from the Australian Prudential Regulation Authority (APRA). This brings the annual rate to 6.2% (although if the December rate is annualised, the annual rate is closer to 9%).
The southeastern capitals have experienced significant growth in property prices in recent years. This was one of the main reasons why APRA introduced a 10% cap on property investor loan growth in 2014, as it was the simplest means of reducing the funding available to property investors. It also forced many banks to dial back on aggressive marketing.
This seemed to have a significant impact on property investor loan growth, which fell back to more manageable levels last year. However, a cut to the cash rate in August undid much of this work and demand has begun to rise again.
While very few experts would publicly support these types of restrictions in a capitalist market, there was a very simple reason behind the cap. Property investor loan growth of 10% is way above average household income growth, which is between 5% and 6% in the most favourable conditions. It’s difficult to see how this growth in property investor loans could be maintained for much longer without jeopardising the property markets.
Indeed, some experts have gone as far as to suggest that the limit should be between 5% and 7%, which aligns it more closely with household income growth.
There is no doubt that the property market has performed well over the past decade. Australia was one of the few developed countries which did not slide into recession when the US mortgage market collapsed in mid-2007.
While prices in many Australian property markets are far from affordable, the nation has not seen a significant pullback in prices as yet.
Whether it’s welcomed or not, regulators such as APRA have an obligation to police markets and ensure that they’re functioning efficiently. Introducing limits is the prudent thing to do, especially with property investment loan growth advancing far ahead of economic growth and general household income growth.
Measures had to be introduced to prevent prices from becoming so unaffordable that investors were the only ones who could afford to buy property.
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