In late 2011, in the face of the Global Financial Crisis, the Reserve Bank of Australia began a cash rate cutting cycle in order to boost growth and provide a stimulus to economic activity outside the mining sector. Since then, the official interest rate gradually decreased from 4.25% to 2.25% and we are now observing one of the longest periods of interest rate stability. Many economists project that rates may decline further bringing the official cash rate down to new record lows. Supported by easing monetary conditions, strong population growth (1.6% in 2013-14) and solid rises in the median house price (9.9% over the year to the September quarter of 2014), dwelling investment grew 5.1% in 2013-14. Combined, these signs provide some optimism for the Australian economy.

This development is particularly important considering the consolidation in the mining industry as it moves from the exploration to the production phase. Already many in Western Australia and Queensland are reporting signs of the downturn in employment which is associated with this transition. This transition shines a light on dwelling investment, which will become increasingly vital for the overall economic growth in the short to medium term.

During the 12 months to the September quarter of 2014, Sydney and Melbourne recorded the largest house price increases across the capital cities with the median rising 16.6% and 9.4% respectively with investor levels in these markets exceeding 40%. In the context of historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating credit growth, regulatory bodies indicated a potential likelihood of some sort of macro prudential policy.

On December 9 last year, the Australian Prudential Regulation Authority announced its shock move to clamp down on home lending which was coupled with an announcement on the same day that the Australian Securities and Investment Commission would review interest-only loans. APRA has written to banks to warn that it will pay particular attention to specific areas of prudential concern, including

• higher risk mortgage lending, e.g. high loan-to-income loans, high loan-to-valuation loans, interestonly loans to owner occupiers, and loans with very long terms;

• strong growth in lending to property investors, i.e. over 10% growth;

• loan affordability tests for new borrowers, i.e. application an interest rate buffer of at least 2% above the loan product rate, and a floor lending rate of at least 7%, when assessing borrowers’ ability to service their loans.

To ensure responsible lending, ASIC announced that it would conduct surveillance into the provision of interest-only loans as part of a broader review by regulators into home-lending standards. Despite the rapid dwelling price growth, any introduction of macro prudential tools aiming to dampen dwelling price inflation will be harmful for the Australian housing market which only recently experienced a painful period of stagnation. Not only will macro prudential tools threaten the share of first home buyers on the market which in November 2014 stood at the record low 11.4% but they will also exacerbate the recent trend of many first home buyers turning to non-saving based sources in order to raise a deposit. Furthermore, tighter controls on housing loans that target property investors are not necessary given non-performing housing loans have drifted lower since peaking in mid-2011 and, according to the APRA, account for less than 0.7% of total housing loans in June 2013.

It is hardly surprising that the favourable interest rates environment from 2011 to today has prompted investors to rush in and that the price in the undersupplied market increased significantly after a sluggish 2010-11. Currently, however, dwelling prices are not showing the same degree of increase they were showing in 2013 and the trend for the September quarter of 2014 was a cooling off of the market nationally.

In New Zealand, the cooling housing market led the Government to phase out macro-prudential restrictions on home loans after only two years following their introduction in late 2013.

With the national shortfall of dwelling stock estimated at 100,000 and the potential for housing to provide an aid during the transition towards the postmining boom economy, any changes to the current arrangements would likely cause uncertainty and threaten robust demand from owner occupiers and investors alike. Ultimately, it could potentially impact building activity, employment and overall growth.