Australia’s regulators tighten check on loans as home prices and building approvals increase

Australian home prices hit new records while building approvals jumped the most in seven months, even as regulators launched new measures to cool the red-hot property market.

The country’s corporate watchdog said this week it was introducing a new round of industry surveillance to ensure banks and brokers were not recommending overly expensive interest-only loans to customers.

The move by the Australian Securities and Investments Commission follows steps announced last week by the banking watchdog to tighten rules on interest-only loans, which investors favour.

The measures highlight the pressure that regulators are under to cool sizzling property prices as record low interest rates lead households into a debt binge.

The surge in property prices has also boxed the Reserve Bank of Australia into a corner.

“The RBA can’t cut rates for fear of further fuelling an overblown housing market, and the RBA can’t [raise] rates due to fear of depressing an already tepid domestic economy,” said Matthew Peter, the chief economist at asset manager QIC.

The reserve bank last month left interest rates on hold for a seventh consecutive month.

The latest data from property consultant CoreLogic showed home values in Sydney jumped an annual 18.9 per cent, while those in Melbourne surged 15.9 per cent. Canberra saw a 12.8 per cent rise, while Hobart recorded 10.2 per cent.

In a welcome sign, approvals to build new homes climbed 8.3 per cent, the most since July last year, data from the Australian Bureau of Statistics showed.

Multi-unit approvals gained 11 per cent, pointing to a healthy pipeline of construction for the year ahead.

Also adding fuel to the country’s biggest-ever home construction boom, the value of building approved soared nearly 20 per cent, with non-residential leaping 34.5 per cent.

Some economists expect home prices to temper as supply catches up with demand.

“Investors need to be aware of the risks, including recent actions by regulators to slow housing demand,” said Savanth Sebastian, a senior economist at CommSec.

Already, banks have jacked up mortgage rates on interest-only loans – popular with property speculators.

Variable interest rates on investor loans from Commonwealth Bank of Australia – the country’s top mortgage lender – are as high as 5.94 per cent, compared with 5.25 per cent for owner occupiers and an official cash rate of 1.5 per cent.

The securities commission said eight major lenders would provide remediation to consumers who suffered financial difficulty as a result of shortcomings in past lending practices.

“We can expect lending conditions for investment purposes will tighten,” said Tim Lawless, the head of research at CoreLogic.

“Additionally, higher mortgage rates handed down by Australia’s major banks may contribute towards cooling some of the exuberance being seen in the largest capital city housing markets.”

Meanwhile, retail sales unexpectedly fell 0.1 per cent in February, adding to growing evidence that debt-laden households were tightening their purse strings.

Data showed sales were down 0.1 per cent when economists were hoping for a 0.3 per cent gain. That fall, plus record low wages growth, a lacklustre job market and core inflation below the Reserve Bank’s target band of 2 to 3 per cent, all argue against a rise in official rates.