08/04/2021 - 10:05

Intervention likely for overheated market

08/04/2021 - 10:05


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Federal agencies are weighing up how best to respond to the seemingly irrepressible housing market.

 Intervention likely for overheated market
Rising house prices show no sign of slowing. Photo: Gabriel Oliveira

Federal agencies are weighing up how best to respond to the seemingly irrepressible housing market.

An ‘up-crash’ doesn’t sound as painful as a conventional crash, but it might turn out that way. The issue particularly concerns those invested in residential property, with financial regulators toying with a range of tools to reel in the feeding frenzy that is pushing home prices through the roof. Pleasing (and profitable) as the rising prices are for anyone already in the market, a sudden surge in values can have negative effects, such as:

• squeezing first-time homebuyers out of the market;

• causing buyers to overbid, leading to heavy future losses;

• driving rents up and tenants out of their homes; and

• encouraging a loosening of lending standards, which creates future problems for banks (think sub-prime lending that led to the 2008 GFC).

Higher interest rates are the most obvious tool for the federal government to control surging demand for property, which promises to deliver boom-time price rises of up to 30 per cent over the course of 2021.

But with the Reserve Bank of Australia following the lead set by the US Federal Reserve, a significant rate hike seems unlikely in the short term, even if it would help dampen property enthusiasm.

The problem with interest rates is that they are a blunt instrument, hitting business loans as well as private sector mortgages; and after the shock of COVID-19, governments around the world are doing everything possible to get business back on its feet.

The RBA and other government monetary agencies that control the Australian financial system are considering a range of ‘macroprudential’ policy changes, which to the uninitiated basically means putting a government boot on the flow of money.

Older readers will remember a time before widespread use of interest rates as the preferred system of monetary control, when the government could simply order banks to stop lending.

Back in 1974, during a financial crisis caused by soaring oil prices in what became known as the first oil shock, the Australian government blocked bank lending, forcing homebuyers to borrow from secondary financiers such as building societies and credit unions.

 It didn’t matter whether you had been a bank customer for 20 years, lending was rationed, stifling the residential property sector.

Nothing like that is likely to happen this time, but the government has a range of macroprudential tools to tame a runaway market, including:

• limits on interest-only lending, forcing buyers to make bigger personal contributions to a property purchase;

• limits on borrowers already carrying heavy debt commitments; and

• an increase in mortgage interest rate serviceability ratios.

There are other options open to the regulators, such as a cap on investment property lending.

What action might be taken is yet to be revealed, but it is increasingly likely that some form of government intervention will be required to cool an overheating property market before it damages the broader economy, and the RBA is forced to fiddle with interest rates.

Investment bank UBS is in no doubt action to exert control of the housing market will be taken, telling clients that it’s just a matter of time.

“With the RBA still maximum dovish [encouraging economic expansion], all-time-low interest rates, and banks willing and able to lend, Australia is experiencing a housing up-crash,” UBS said.

It said Australia’s peak government financial controller, the Council of Financial Regulators, was watching housing and would continue to closely monitor developments and consider possible responses should lending standards deteriorate and financial risks increase.

UBS reckons the up-crash, which has encouraged long queues of prospective buyers at home-open events, and with properties earmarked for auction selling for well above the reserve price before auction day, tighter regulations will be introduced late this year with little or no change in interest rate settings.

In other words, mortgage repayments might not change but it will be harder to get a loan, which will squeeze weaker borrowers out of the market.

Finding value ASSET values, like beauty, can be in the eye of the beholder.

And there’s no better illustration of that point than in the valuation chasm between how different banks perceive two darlings of the investment community: Fortescue Metals Group and Afterpay.

Local iron ore champion Fortescue has performed brilliantly during the past three years, courtesy of an iron ore price driven into the stratosphere by strong Chinese demand for steel and a shortfall in ore shipments from Brazil.

From a low of just $3.66 in 2018, FMG stormed up to $26.40 in early January while also showering its shareholders with a flow of generous dividends.

Afterpay has done better thanks to a belief held by some investors that it has reinvented banking by making it easier for consumers to buy what they want with generous repayment terms.

Investors love the Afterpay story and similar stocks such as Zip, propelling the Afterpay share price from $8 at this time last year to a recent peak of $160, a remarkable rise of 1,900 per cent, easily outstripping FMG’s lowly 621 per cent.

The problem for any high-flyer, whether corporate or personal, is staying up; and that means the doubters are emerging.

In the case of iron ore, analysts at Morgan Stanley reckon the market is developing a ‘realisation’ gap, as steel mills demand more high-grade ore and less low grade of the sort mined by Fortescue.

If Morgan Stanley is right, the gap could help push Fortescue’s share price down as low as $6.55, a forecast dismissed by rival investment bank Macquarie, which believes the Western Australian miner will continue to ride high, perhaps all the way back to $25.50.

If the ‘buy or sell’ situation is confusing for investors in Fortescue, then consider Afterpay.

It is about to get its first serious competitor in the form of Commonwealth Bank, which will launch a rival consumer-focused card later this year, an event UBS argues will help drive Afterpay’s share price down to $36.

Oil watch THE COVID-19 pandemic and the rush to locally manufacture the AstraZeneca vaccine have been such dominant events in national politics that an equally important matter of local production for national security has been quietly forgotten.

Oil refining, which was once regarded as a critical process, has almost ended in Australia, with WA’s Kwinana refinery the next to close its doors.

Given the rising tide of geopolitical uncertainty in the Asia-Pacific and China’s trade war being waged against Australia, it is possible that excessive focus on COVID-19 has sown the seeds of a future energy security crisis.


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