IMF warns of risky property price growth

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The International monetary Fund (IMF) has released a paper calling for stricter lending rules to be introduced globally in order to stop banks from fuelling housing bubbles.

In its report, Key Aspects of Macroprudential Policy the IMF argues for heightened use of ‘macro-prudential policies’ – including LVR caps and caps on debt to-income ratios – in order to rein in ‘excessive’ mortgage borrowing and questions whether record-low interest rates are sparking potentially risky property price growth.

The paper follows APRA’s Loan serviceability standards in housing lending  report, released last week, claiming interest rate hikes are ‘inevitable’ and that a strong focus on debt serviceability is ‘critical’ in the current low interest rate environment.

According to the Australian Financial Review, the IMF paper ‘underscores’ a growing global movement towards more activist approaches to rising property markets, including in the UK, Canada and New Zealand, where official interest rates are at record lows and lending controls are in place on banks.

Yesterday, global bank Citigroup published a report warning that rising house prices could potentially limit the RBA’s ability to use rate cuts as a way of combating a rise in unemployment and other economic factors.

“The scope to cut would be compromised if house prices continue to accelerate and precipitate a surge in leverage,” said Citigroup economists Paul Brennan and Josh Williamson.

“We doubt that APRA and the RBA are ready to follow the Reserve Bank of New Zealand in announcing controls on LVRs of housing loans, but APRA has indicated a desire to apply tougher prudential standards on how banks assess lending risks.”

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  • Mika says on 17/09/2013 02:08:46 PM

    Is it low interest rates causing the rise or is it local and foreign investment purchases which raise prices to an unobtainable level for local families??? One owner buys five houses in the same street by raising the price by $150.000 before auction is not uncommon. Houses bought before auction for $1.500.000 in cash...$200.000 above guide price pre-auction is not a natural rise in demand for housing or homes. Perhaps a control of owner occupy purchase or house ownership limit, as overseas, would see our market stabilise at a more sustainable level. As things are now, Australia provides the most fertile ground for 'land banking'.

  • Adrian says on 17/09/2013 07:15:43 PM

    Yes, I definitely agree with this article. Currently Australian Property markets are rising but unemployment has also risen. This means we are in a two speed economy. The only solution I believe is to set a higher interest rate to new property purchases of minimum 7% for 2-4 years and a cheaper interest rate post this timeframe and for people with existing mortgages. A higher interest rate will mean that there is less people competing at auction which in turn does not create "bubble" prices. It also means that if people choose to save a greater deposit as a result of choosing not to buy in the present market, they are not faced with a much greater purchase price when they come to bid on the property they want to buy down the track.

  • Bob says on 17/09/2013 08:29:18 PM

    Interest rates should go to 1-2%, this will make prices rise but it should then also hit a upper limit which is the true value of the market. look at US interest rates. we get smashed in Australia.

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