Housing market conditions have slowed considerably in Sydney, with prices cooling following the retreat of property investors.

While the Melbourne housing market has shown greater resilience to a slowdown, the Victorian capital’s quarterly rate of growth has slowed since peaking at 4.4% in November 2016.

Despite these mixed conditions, the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) can take comfort in knowing that their strategy of supervising banks to control the build-up of excessive risk in investor lending is working as intended.

The RBA may be concerned that lending to households overall is still outpacing income growth, but appears to be counting on the economy lifting wages rather than planning further restrictions on bank lending to do the job.

RBA Governor Philip Lowe has made it clear he is not prepared to slash rates to speed the return of inflation to the target band for fear of further igniting the hottest housing markets. But he is equally not prepared to lift rates to slow the growth of housing debt.

The latest Hedonic Home Value Index from CoreLogic indicates that the Sydney housing market has been flat-lining over the last quarter. The annual growth rate peaked at 19% in November 2016 and has been softening ever since.

While APRA did order banks to limit interest-only loans to 30% of new residential mortgage lending at the end of March, new investment loan approvals nationwide have been declining since January.

The RBA’s monthly lending report indicates that the overall growth in the property investment loan portfolio has been $10.9bn in the six months since the market began cooling, compared with $19.3bn in the previous six months.

Tim Lawless, CoreLogic’s head of research, believes the slowdown was initially sparked by the banks tightening lending as they approached the 10% growth limit on their loan portfolios, which was imposed by APRA in late 2014.

After initially working to constrain investor lending in the second half of 2015, the banks found themselves below APRA’s cap by the middle of last year, with lending accelerating again throughout the latter half of 2016.

The tightening of lending this year was accompanied by higher rates for investor borrowers and for interest-only loans.

The banks have responded to the concerns of the Reserve Bank and APRA about interest-only lending, although the 30% limit only applies from the September quarter. Collectively, they wrote $30.6bn in interest-only loans in the June quarter, which was 7% less than in the March quarter and 17% less than in the June quarter of 2016.

According to Lawless, the interest premium on investor loans above owner-occupier mortgages blew out by about 50 basis points, while there was a further 50 basis point premium for the interest-only loans largely favoured by property investors. A full percentage point increase has made a considerable difference to demand.


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