Scott Morrison flags property investor crackdown, ASIC's Greg Medcraft warns on housing 'bubble'

Extract from ABC News

By business reporter Michael Janda

Updated yesterday at 4:46pm

Photo: Treasurer Scott Morrison has flagged the possibility of tighter restrictions on investor loans. (ABC News: Nick Haggarty)

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Australia's Treasurer and chief corporate regulator have both flagged a further crackdown on property investor loans, as the regulator implies house prices are at risk of a massive fall.

Key points:

• ASIC boss warns housing prices typically revert to four times incomes; Sydney above 12, Melbourne near 10
• Regulator says banks "trusted" by borrowers to determine if they can afford a loan
• Treasurer says regulators discussing further limits on property investor lending

Limits on investor lending were first introduced in late-2014 in an attempt to cool an overheating property market.
However, with recent home price index readings showing annual price rises of around 18 per cent for Sydney, 15 per cent for Canberra and 13 per cent for Melbourne, and official data showing a renewed surge in property investor lending, financial authorities have floated the possibility of tightening those rules restricting investment loans.
"There remain pressures that have built up again over the last few months," observed Treasurer Scott Morrison.
"Australia has a very high proportion of interest only loans and these are issues that have been the topic of discussion.
"I had discussions with the Council of Financial Regulators and we've been looking at these issues on the investor side, on the demand side, quite significantly, and that is the appropriate place for that discussion to take place.

"For those prudential regulators to be addressing those issues using the levers that they have.

"They've done it before wisely and it's for them to take any further action that they see as necessary."

'Sceptical' Medcraft warns housing 'bubble' can burst

Speaking at the Australian Security and Investment Commission's (ASIC) annual forum in Sydney, the head of the corporate watchdog agreed that so-called macroprudential rules to limit certain types of higher-risk lending were useful.
However, ASIC chairman Greg Medcraft also said he thought the Australian housing market was in a bubble.

"I've been saying for a while, having lived through many residential mortgage markets, that I thought it was a bubble for a while, other people are catching up now," he said.

That means there is a risk of significant price falls to get back to reasonable levels.

Edge of a cliff? Housing in 2017

There are plenty of forecasts around the Australian housing market in 2017 - and few are positive.

Mr Medcraft observed that average house price to income ratios across much of the world tend to be around four.
"I've been through so many crises where every time I'm told, 'oh it's different this time, there's a good reason this time'," he warned.
"And it's really amazing, if you look at the US housing market after the crisis, it reverted back to four times [house price to income ratio]."
To put Mr Medcraft's observation in context, the latest Demographia housing affordability survey, which puts the median US home price at 3.6 times income, puts Australia's median house price at 5.5 times income, with the major cities at 6.6, Melbourne at 9.5 and Sydney at an eye-watering 12.2 times income.
Mr Medcraft said he was sceptical of Australian exceptionalism.

"Maybe things have changed, maybe it is all different this time, but I'm probably one of those that is sceptical, frankly," he added.

Westpac not alone

It's a fair bet all four major banks are facing ASIC scrutiny over poor home loan approval practices.

In that context, Mr Medcraft said he was deeply troubled by conversations he had recently had with borrowers who were not confident that they could meet their repayments.
"I was talking to a bunch of young people recently and they said, 'even though we're not sure that we can afford our mortgage, you know what really excites us is when we get the mortgage approval because it means the bank actually thinks we can repay it'," he said.
"Our credit providers are in a trusted position and we need them to act responsibly because consumers are relying on them."
ASIC has launched action against Westpac over alleged breaches of responsible lending laws, and is investigating up to 10 other financial institutions.