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Reserve Bank warns regulators could take drastic action to cool Sydney, Melbourne housing market

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The Reserve Bank has warned regulators could take drastic action to slow Sydney and Melbourne’s runaway housing markets. 

In the minutes of its April meeting, released Tuesday, the RBA said the Council of Financial Regulators regulators could clamp down on home loans and “consider further measures if needed” to maintain financial stability. 

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The council, which includes the Australian Securities and Investments Commission (ASIC), Treasury, and the Australian Prudential Regulation Authority (APRA), would keep a watching brief on the market as it responds to its previous warnings to keep investor loans and interest only loans in check.

“Developments need to be kept under review … depending on how the system responds to the [previous] measures,” the minutes stated.

The RBA said the Council of Financial Regulators 'would consider further measures if needed' to maintain financial stability. The RBA said the Council of Financial Regulators ‘would consider further measures if needed’ to maintain financial stability.  

The RBA also appeared to take aim at “particular features of the tax system,” including negative gearing, which the Turnbull government has all but ruled out tinkering with in the lead up to the May budget despite its influence on increasing loans to investors.

“Members observed that a number of factors make interest-only loans attractive in the Australian context,” the minutes stated.

“In particular, interest-only loans allow investors to take greatest advantage of particular features of the tax system.”

The RBA reiterated it was concerned by the level of housing credit, particularly in Sydney and Melbourne where house prices have risen by 18 per cent and 13 per cent over the past year respectively.

Reserve Bank governer Philip Lowe Reserve Bank governer Philip Lowe  Photo: Brendon Thorne

“Growth in housing credit to owner-occupiers had moderated slightly over the preceding six months, while growth in housing credit to investors had increased, although investor loan approvals had declined in February,” the minutes said.

On Tuesday, Deloitte Access Economics’ quarterly business outlook noted Australia had overtaken Denmark to become the world’s second-most indebted households in the wake of “dangerously dumb” house prices that were “threatening to blow”.

For more than 20 years, the Reserve Bank has been the stand-out institution of economic management in this country but ... For more than 20 years, the Reserve Bank has been the stand-out institution of economic management in this country but will it retain that status? Photo: Sasha Woolley

“The seeds of future slowdown are already well and truly sown. The better that NSW looks now, the greater the troubles that this state is storing up for the future,” the outlook warned.

“The joy of rising wealth eventually gives way to the pain of servicing gargantuan mortgages. Interest rates are beginning to rise around the world and although official interest rates in Australia may not follow suit until 2018, that augurs badly for the disposable incomes of Sydneysiders.”

Outside of housing, RBA board members noted conditions in the global economy had continued to improve over 2017.

“Survey measures of business conditions in both the manufacturing and services sectors were at high levels and growth in industrial production had increased further,” the board found.

On the domestic economy the RBA noted that conditions in the labour market had been somewhat weaker than had been expected.

“The unemployment rate had increased to 5.9 per cent in February and measures of underemployment – which capture workers who are willing and available to work more hours – had remained high,” the board found.

“Overall, the ongoing spare capacity in the labour market was contributing to low wage growth outcomes.”

The board concluded by noting that “developments in the labour and housing markets warranted careful monitoring over coming months”.

JP Morgan analyst Ben Jarman said this was an unusually specific remark following previous observations that current policy settings are “consistent with sustainable growth in the economy”.

“If an interest rate move is to be made in the near term, down is much more likely than up, so today’s shift in guidance can only feasibly be read as the RBA opening the door to a possible easing,” he said.

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