There has been talk of a real estate bubble in Sydney and Melbourne at least since 2001. However, recent comments by the head of Treasury Head John Fraser that both these states are in the grip of a housing bubble has set the hares running. This no doubt is his intention: to use rhetoric as a lever to hose down the market. Many agents agree that these markets are peaking and REIA has for some time reminded buyers that interest rates can go up as well as down and that it is important not to overcommit with excessive borrowings. Australians have a great love affair with property and it is in our sector’s interest for confidence in housing to continue.

However talk of a bubble is premature, particularly with an undersupply of housing in Australia and demand exceeding supply. REIA is a strong advocate for the barriers to supply being tackled such as land release, removal of stamp duties, developer charges, and excessive regulation. More housing will ease the stress on Sydney.

We need to get a perspective on this. The most recent REIA statistics show prices are falling in other parts of Australia – Perth, Brisbane – and segments of the market in Adelaide and the ACT remain flat. Mr Fraser himself said that regional parts of NSW were on a different page to the capital city market.

He said the major drivers of the housing bubble were low interest rates and easy access to finance, and he was concerned about the amount of money being poured into the housing market with rates so low. But the evidence of a housing bubble in the rest of Australia was not strong, he said. Mr Fraser says it is “rightly” getting a lot of attention and is occupying the interest of the Reserve Bank and the Australian Prudential Regulation Authority.

The Chair of APRA, Wayne Byres gave a recent speech on the importance of reinforcing sound lending standards.

The current economic environment for housing lenders is characterised by heightened levels of risk, reflecting a combination of historically low interest rates, high household debt, subdued income growth, unemployment that has drifted higher, significant house price growth, and strong competitive pressures. Many of these features have been emerging over a number of years, and APRA’s supervision has been intensifying in response. In addition to a heightened level of supervisory activity at individual Authorised Deposit-taking Institutions (ADIs), APRA has, for example:

• increased the level of analysis of mortgage portfolios, including regular review of detailed data on Authorised Deposit-taking Institutions underwriting policies and key risk indicators, to identify outliers;

• written to boards of the larger lenders, seeking their written assurances with respect to their oversight of the evolving risks in residential mortgage lending; • issued a prudential practice guide (APG 223) on sound risk management practices for residential mortgage lending; and

• completed a stress test of the largest Authorised Deposit-taking Institutions with two scenarios focused on a severe downturn in the housing market.

“Up to this point, we have opted to stick with traditional micro-prudential tools targeted at individual Authorised Deposittaking Institutions and their specific practices, albeit with an eye to financial stability risks as well as the safety and soundness of individual entities,” he said. We are not seeking to determine an appropriate level of house prices, or a particular level of household debt. That is beyond our mandate. Our goal is simpler: reinforcing sound lending standards, which is the ‘bread and butter’ work of a banking supervisor.

“Lending standards are important for the stability of the Australian banking system, and given the importance of housing-related lending, it should not be surprising that APRA supervisors are increasingly vigilant on the risks this lending presents. Put simply, if all our eggs are increasingly being placed in one basket, we need to make sure the basket isn’t dropped. ADIs that have continued to adopt sensible practices and prudent credit assessments should welcome this approach, as it strengthens their capacity to compete without being reckless. On the other hand, ADIs with more aggressive practices should fully expect to find APRA increasingly at their doorstep.”