In a desperate scramble to control the ups and downs of Australian property prices, some industry insiders are suggesting we should follow the lead of overseas countries and introduce a lending cap for homebuyers.
This would see tougher restrictions on the percentage of a property’s purchase price buyers could borrow from the banks.
But is such a move really going to prevent wild swings in house prices?
According to a Sydney Morning Herald article, head of the Reserve Bank’s financial stability department, Dr Luci Ellis doesn’t seem to think so.
Rather than containing the so-called boom-bust cycles that we currently see, Ellis thinks such a move would only make it more difficult for first homebuyers to break into the market.
”The cap would have to be set very low to be binding on existing home buyers who are trading up,” Dr Ellis said. ”First home buyers would be squeezed out, but most buyers would be little affected.”
Countries like Hong Kong have trialed this type of lending cap with little success, finding that although the move to restrict borrowing capacity resulted in less defaults it did not put a lid on property prices.
In late 2010, anyone buying into the Hong Kong market in the price range of $HK8 million ($A1 million) to $HK12 million could not have loan-to-valuation ratios greater than 60 per cent. In contrast, Australian homebuyers can borrow up to 90 per cent or more of a property’s purchase price.
While Ellis agreed that lower default rates were “not a bad thing”, she said that, “The cap would not prevent boom-bust cycles in housing prices,” as some have suggested.
Dr Ellis said the primary task of regulators was to ensure the economy’s stability, rather than shield banks from lower default rates.
Instead of reviewing lending regulations, Dr Ellis suggests that the onus is on buyers to make sure they don’t get in over their heads in the first instance and borrow more than they can afford.
”People need to provide some deposit when they buy a home. It protects them if something goes wrong for them, like a job loss or illness, especially if it happens at the same time that housing prices are falling,” she said.
Restricting borrowing capacity will not “fix” the natural cyclical movements of property markets. Our property markets are far more complex than that being influenced by so many factors including population growth, demographics, supply and demand and of course, market sentiment.
Currently the banks have tighten their lending criteria and while this will annoy some property investors looking to get a loan, I see it as a healthy sign – we need a strong and stable banking sector and responsible lenders so we don’t end up with the same financial problems many overseas countries have found themselves in.
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