Why the regulatory crackdown may not stop housing boom

This week, new information about year-on-year house price growth reignited fears of a property bubble. According to CoreLogic, Australian house prices are rising at their fastest pace in 7 years, having increased 12.9% in the past 12 months, with Sydney and Melbourne surging by 18.9% and 15.9%, respectively.

(Source: CoreLogic)

The Reserve Bank of Australia’s interest rate cuts last year, to a historic low of 1.5%, are partly to blame for this rise. Recently, in an effort to contain this, the Australian Prudential Regulatory Authority (APRA) and the Australian Securities and Investments Commission (ASIC) announced measures targeting interest-only home loans. But the RBA did nothing, leaving interest rates on hold, even though it delivered warnings regarding the state of the housing market. Are these measures enough?

According to REA Group’s chief economist Nerida Conisbee, these measures have failed in Australia’s two largest cities, and prices should continue to rise at least throughout April:

“Cooling measures pushed through by APRA and banks continuing to increase rates independently of the RBA have failed to stem the skyrocketing prices in Sydney and Melbourne. With the impacts from these measures likely to take some time to flow through, people can expect to see continued property price increases throughout April.”

While regulators are trying to reduce demand by tightening mortgage lending rules, governments, on the other hand, seem to be doing the opposite. According to “The Conversation“, NSW Premier Gladys Berejiklian, for example, favors extending the first-home owner grant from new properties to existing properties in the June state budget. This would be a clear stimulus to demand, as first-home owner grants typically increase the price of housing by at least the amount of the grant.

Finally, one major driver of housing demand, “negative gearing”, will most likely remain untouched in the near future. This tax break allows investors to claim the income losses, from financing and other costs of their rental properties, against other income. This incentive is particularly important, as investor loans make up just over one-third of the $1.49 trillion residential property market, according to the APRA. About 15% of the electorate has become buy-to-let investors, which makes reforming this tax more difficult from a political perspective.

It’s important to note that Australian levels of oversupply are still far from the levels seen in Spain and Ireland before the house price crashes.

So, at least in the short-term, house prices should continue to rise.

If you want to learn how to invest in stocks and analyse the market to identify profitable or deadly turning points, contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email info@ugc.net.au to learn about Quality, Value, Trend (QVT) investment selection methodology.

For a small yearly fee, learn how to take advantage of the current bull market and stay ahead of the crowd, with access to market news, updates and 20-30 stock recommendations per year in the Australian and US markets!

Previously an exclusive of UGC clients, UGC Research gives you access to the proven strategies used by UGC Securities to identify high return, low risk investment opportunities.

The information contained in this article is General in nature and has been prepared without taking into account your objectives, financial situation and needs.

Joao Costa Pereira
Follow me

Joao Costa Pereira

Equity Research Analyst at United Global Capital
BSc Economics, MSc Finance
Joao is an Equity Research Analyst at UGC
Joao Costa Pereira
Follow me