We can't 'hold back the tide' in housing market: APRA's Wayne Byres

Australia's powerful banking regulator has stressed it cannot "hold back the tide" of the property cycle and exert control over house prices, underlining the limitations of recent curbs on bank home lending.

Wayne Byres, chair of the Australian Prudential Regulation Authority, highlighted this reality as he also flagged "further tightening" from banks in the $1.5 trillion mortgage market.

In response to a rapid build-up of household debt and soaring Sydney and Melbourne house prices, Mr Byres last month unveiled new caps on interest-only lending by banks, causing lenders to raise interest rates for some borrowers.

ANZ was the latest bank to respond on Friday, raising fixed interest rates for customers taking out interest-only home loans by up to 0.4 percentage points. It also cut fixed rates for borrowings taking out principal and interest loans.

Experts believe APRA's curbs are behind a gentle slowdown in the property market in the last month, but Mr Byres on Friday emphasised the regulator's main focus was not house prices, which moved in response to underlying market forces.

"Property prices are driven by a range of local and global factors that are well beyond our control: whether prices go up or go down, we are, like King Canute, unable to hold back the tide," Mr Byres said at a Committee for Economic Cooperation of Australia event.

Instead of controlling prices, the regulator's goal is to protect depositors who have entrusted their money to banks by trying to ensure banks are prudent. Even so, APRA's intervention is closely linked to house prices, as it was launched in response to fears of the economic risks created by an overheated property market.

APRA's crackdown last month was its second intervention since late 2014, when it targeted property investors and poor lending standards.

Mr Byres said such interventions were "unusual" for the regulator, but warranted in the high-risk environment of cheap credit, high house prices and debt levels, and low income growth.

He said the regulator's 2014 restrictions had made a difference - pointing to fewer low-deposit loans being written, and the higher interest rates that property investors are now charged compared with other borrowers. As banks respond to the latest curbs on interest-only lending, there was likely to be "further tightening," he said.

"As a result of our most recent guidance to lenders, we expect some further tightening to occur," he said.

Mr Byres did not specify if further tightening would occur through higher interest rates - as some analysts expect - or credit rationing by the lenders.

Other speakers at the event also argued underlying forces - strong demand for property and a lack of supply - were the main reasons for the strength in the Melbourne and Sydney markets.

Commonwealth Bank's global head of real estate, Graeme Ross, said foreign buyers had become a "very material" proportion of buyers in the NSW residential real estate market. He pointed to figures showing Sydney apartments remained cheaper than those in China, and offered a higher return.

"It's underpinned by very strong demand. People want to diversity their capital," he said. "There's some really strong, fundamental drivers as to why people are investing in Australian housing markets from offshore."

Reserve Bank governor Philip Lowe said earlier this month that restrictions on bank lending could lower financial risks but "the underlying driver in our housing market is the balance between supply and demand."

"The availability of credit is undoubtedly a factor that can amplify demand, but it is not the root cause," Dr Lowe said.

SMH/ April 28 2017