RDP 2010-06: Asset Prices, Credit Growth, Monetary and Other Policies: An Australian Case Study Appendix A: Timeline of Key Public Statements/Publications

RBA – SMP

‘It is possible that the recent concentration of activity has resulted in some degree of overbuilding in some areas.’ p 21

APRA – Working Paper: Asset Price Bubbles and Prudential Regulation

‘On balance we conclude that the role for financial regulation in controlling the emergence of, and damage from, asset price bubbles remains relatively limited.’ p 22

RBA – SMP

‘… the current level of building approvals is well above most estimates of underlying demand.’ p 28

‘… mounting evidence that rental vacancy rates are rising, particularly for medium-density dwellings …’ p 28

RBA – SMP

‘Oversupply is particularly evident in medium-density dwellings, where there are high vacancy rates in some states.’ p 24

RBA – Media release after policy tightening

‘To persist with a strongly expansionary policy setting would risk amplifying inflation pressures and, over time, could fuel other imbalances such as the current overheating in the housing market, potentially jeopardising the economy's continued expansion.’

RBA – SMP

‘A continuation of this trend [of rapid increases in debt] clearly carries the risk of households, at some point, becoming overstretched.’ p 2

RBA – Governor – Testimony to House of Representatives Standing Committee on Economics, Finance and Public Administration

‘I do not think we are going to get that overshoot [in asset prices]. I sincerely hope it does not happen because those sorts of events are very disruptive.’

‘… overall average measures of house prices are still going up, but we can see in some important areas that oversupply has already occurred.’

RBA – Media release after policy tightening

‘… continued rapid expansion of household debt.’

‘Today's action is aimed at reducing the risk of potential imbalances, and thereby promoting sustainable expansion of the economy with low inflation.’

RBA – Bulletin: Recent Developments in Housing: Prices, Finance and Investor Attitudes

‘It would be unlikely that further strong price increases could co-exist with rising vacancy rates and falling rental yields for very long. It is more likely that any assumption by investors that future capital gains can be assured will have to undergo some revision.’ p 6

RBA – SMP

‘[The continued rapid growth in investor finance] looks to be in part a result of expectations by investors that the strong increases in housing prices over recent years will continue into the future. However, the attractiveness of this form of investment now appears to be waning, with the potential for further capital gains in the housing market likely to be countered by increased supply of rental properties, rising vacancy rates and falling rents in some areas.’ p 2

RBA – Speech – Governor: What Does Good Monetary Policy Look Like?

The rate of growth in the investor segment in the context of rising vacancy rates and stagnant or falling rents suggests a ‘… mis-allocation of investment, and the likelihood of a shakeout in the market, at least in the major cities. If that is to occur, it is better that it occur sooner rather than later’.

APRA – Media Release: APRA Reminds Banks to Observe Conservative Risk Management Practices

‘While we are not presently observing unsound loan growth in any systemic sense, we urge the industry to maintain prudent property lending practices …’

RBA – Speech – Deputy Governor: Medium-term Economic Prospects for Australia

‘But at present, our focus is on the role of investors in rental dwellings, which has become much more prominent in the past couple of years. These are people who presumably have been attracted by perceptions of capital gains and tax advantages of leverage, and who recently may have been disappointed with returns in the share market.’

‘It is getting harder and harder to believe that the prospective returns from that outlook are high enough either to sustain valuations which are so high relative to historical experience, or to warrant the $4–5 billion which is being loaned to investors each month.’

RBA – SMP

‘Investors have played a large part in the buoyancy of the housing market, accounting for virtually all of the growth in new finance approvals in the sector over the past year, presumably in expectation of strong growth in prices. It has been apparent, however, that this process would not be sustainable indefinitely, with emerging oversupply being bound at some point to limit the scope for further price increases.’ p 3

RBA – Speech – Governor: Monetary Policy in an Uncertain World

‘It seemed pretty clear to us that investors were moving into an already over-supplied market, and this behaviour could only be explained by their usual desire for tax minimisation plus their expectation that they would benefit from future large capital gains, an expectation which was encouraged by the marketing programs employed by developers of investment properties.’

‘It is the length of this expansion, as much as the other things I have described, that provided the environment which encouraged this type of investor behaviour.’

RBA – Governor – Testimony to House of Representatives Standing Committee on Economics, Finance and Public Administration

‘Our purpose in what we have been saying is to try to get the market to work a little better and so avoid the overshooting that so often characterises parts of the property market.’

‘… the market works, but with long lags during which people are encouraged to take decisions based on little more than optimistic extrapolation of what happened in the past. Developers will continue to put up new apartment blocks while there are investors willing to precommit to buy. These are the investors who turn up at seminars where they are told by the developers how they can become very rich if they highly gear themselves and buy an apartment.’

RBA – Bulletin: Innovations in the Provision of Finance for Investor Housing

‘… prospective capital gains and the ability to negatively gear for tax effectiveness have always been the major incentives for this type of investment [in rental housing].’ p 1

‘Over the course of the 1990's … the supply of finance increased markedly, making geared investment in rental properties available to a much wider cross-section of the public than formerly.’ p 1

APRA – Report on Broker-Originated Lending

The Australian market for broker-originated lending is reasonably safe however: ‘Over half of the institutions (53%) base the broker's remuneration solely on the volume of business generated, providing brokers with an incentive to generate loan volume without appropriate regard for risk. With such an incentive structure it is critical that ADIs have procedures in place to ensure their own credit assessment standards are rigorously applied to broker-introduced loans’.

RBA – SMP

RBA – Speech – Deputy Governor: The Economic Outlook

‘With one exception, we have not rushed to ring alarm bells about excessive debt. The exception is, of course, the rapid growth in debt to finance investment in rental properties, where we felt during 2002 that people were being drawn into a position of high leverage by unrealistic expectations of returns. At some stage down the track, this is likely to result in disappointment for many and distress for some …’

APRA – Speech – C Littrell: Mortgage Lending Practices: The APRA View

‘… the psychology of home lending has changed from a credit rationing process to a product marketing process.’

‘Although home lending is generally safe, in APRA's view lenders have become too comfortable with this product …’

ASIC – Media Release: ASIC Commences Proceedings against Henry Kaye and Others

ASIC launch proceedings against Henry Kaye for dissemination of false and misleading information.

RBA – Speech – Governor: Do Australian Households Borrow Too Much?

‘… for a high proportion of these investors, tax considerations drive the profitability calculations and so provide an incentive to maximise debt.’

RBA – Speech – Deputy Governor: Inflation Targeting: A Decade of Australian Experience

‘Does inflation targeting allow scope for responding to asset price concerns, if that is thought to be sensible? I think it does, provided we are prepared to adopt a sufficiently long time horizon.’

RBA – SMP

‘Although loan approvals for housing have levelled out in the past few months, they remain at a high level consistent with housing-related credit growth of over 20 per cent, which will not be sustainable in the longer run.’ p 3

RBA – Speech – Assistant Governor (Financial System): Financial System Stability – Some Current Observations

‘… the cloud on the near horizon is the substantial build-up in household debt, which may create strains for financial institutions if Australia's economic circumstances were to deteriorate and mortgage defaults rise sharply.’

RBA – Governor – Testimony to House of Representatives Standing Committee on Economics, Finance and Public Administration

‘I think there is now some evidence that in the most speculative hot spots a degree of commonsense is returning. Investor interest in inner city apartments, particularly in this city, is well down and quite a number of proposed projects have been shelved.’

‘We have another financial tool. It is called open-mouth policy, and I have been using it, but it may not be as effective as other tools you could conceive of. I am not putting in a plug for another instrument, although if in the longer run things turned out badly it would not surprise me if people started looking at other arms of policy—for example, tax policy.’

‘I think there is a regulatory gap there. It is clearly a problem if there is one group of people who are holding seminars on how to invest your money who are regulated—the financial planners—and there is another group who are doing almost exactly the same thing, although doing it within the one asset class, which is property, who are unregulated. So I think there is a need to extend the capacity for ASIC to do that.’

ATO – Tax Time Media Kit 2003 – Compliance Focus on Individuals

Increased focus on compliance especially in the area of rental deductions with increased scrutiny and more audits.

ASIC – Media Release: ASIC Obtains Undertakings from Henry Kaye and Others

Obtains undertakings from Henry Kaye limiting his and his associates' ability to provide advice regarding investment in property.

RBA – SMP (with a special chapter on credit growth)

‘The risk presented by these developments [rapidly rising debt and house prices] is that, the longer they go on, the larger will be the contractionary effect on the economy when they inevitably turn.’ p 3

APRA – Speech – N Esho: APRA's Approach to Broker Loans in Authorised Deposit Taking Institutions

‘At present APRA is satisfied that ADIs are effectively managing the risks associated with broker loans, and therefore see no need at this stage to take any particular action in this area.’

ACCC – Media Release: ACCC Targets Property ‘Scammers’

Announcement by ACCC of its intention to target property scammers.

RBA – Speech – Deputy Governor: Economic Conditions and Prospects

‘But there cannot be much doubt either that running up debt today must diminish the scope to do so in future, and that it must also impair, at the margin, the capacity of some households to cope with adverse shocks which might come along.’

NSW Govt – Call on Federal authorities to extend the powers of ASIC to better deal with property spruikers and wealth creation seminars

Successful motion to call on federal authorities to extend the powers of ASIC to better deal with property marketers and wealth creation seminars citing ASIC and ACCC actions.

Council of Financial Regulators – Annual Report 2002

‘… the exceptionally fast increase in borrowing for investor housing has clearly increased risk and that the accompanying rapid expansion in apartment building shows all the signs of a seriously over-extended market.’ p 19

ASIC – Media Release: ASIC Commences New Proceedings against Henry Kaye and National Investment Institute

nvestigations into the operations of Henry Kaye and others for breach of prior undertaking.

APRA – Speech – J Laker: The Resilience of Housing Loan Portfolios – APRA's ‘Stress Test’ Results

‘Over the past seven years, it would seem, housing loan default rates have become uncoupled from growth in housing credit. The likely explanation is that the rapid increase in housing prices over the period has enabled any troubled borrowers to exit the market without incurring losses.’

‘When reality inevitably intrudes, however, the earlier linkages between housing credit growth and loan defaults might reassert themselves.’

APRA – Discussion Paper: Proposed Changes to the Risk-weighting of Residential Mortgage Lending

‘APRA is concerned that the current risk-weightings on loans for which the borrowers' servicing ability is not verified do not adequately reflect the likelihood of increased risk.’ p 3

RBA – Media release after policy tightening

‘Credit outstanding is rising at around 14 per cent per year, and at over 20 per cent to households. That is a much faster rate of growth than can be expected to be consistent with economic stability over the longer run.’

‘The strength of demand for credit increases the danger associated with delaying a tightening of policy that is called for on general macroeconomic grounds.’

RBA – SMP

‘Those risks [associated with the rapid run-up in household debt], discussed at length on other occasions and so not repeated here, appear to be growing. Monetary policy should, as far as possible, avoid adding to them.’ p 3

RBA – Submission to the Productivity Commission Inquiry on First Home Ownership

‘This more favourable treatment has played a role in investors being prepared to accept rental yields that are lower than those seen in other countries. While taxation arrangements are not the source of the current speculative activity in the housing market, they may affect the price dynamics once the attractiveness of investing in housing has improved for other reasons.’ p 54

RBA – Bulletin: Asset Prices and Monetary Policy

‘In particular, the risk of a substantial asset-price correction may be sufficiently low or hard to quantify as to be excluded from any central forecast, particularly at a horizon of only one or two years. But that does not mean that it can be ignored. Rather, these considerations highlight the need for monetary policy to maintain a medium-term perspective …’ pp 53–54

ASIC – Media Release: Receiver and Administrator Appointed to Henry Kaye Companies

Receiver and administrator appointed to Henry Kaye companies.

RBA – Media release after policy tightening

Despite some signs of a change in sentiment in the housing market:

‘Monetary policy is continuing to have a stimulatory effect on the economy through domestic credit expansion. The growth of credit remains rapid and indeed has picked up further in the past few months’.

RBA – Governor – Testimony to House of Representatives Standing Committee on Economics, Finance and Public Administration

‘It is clear that, despite our best endeavours to explain ourselves, a number of people think that the bank tightened monetary policy to cool down the property market … However, such an approach would not be consistent with the truth. For a start, signs of overheating in the housing market were clearly evident through the second half of 2002 and all through 2003, yet the bank did not change monetary policy. It was only when it became clear that good economic growth had returned both globally and domestically that rates were raised.’

RBA – SMP

‘While this [the rapid run-up in household debt] was not the principal driver of policy, it did argue for avoiding undue delay when a case for moving to a less expansionary setting emerged on broader macroeconomic grounds.’ p 3

RBA – Speech – Deputy Governor: Recent Issues for the Conduct of Monetary Policy

‘… it is increasingly clear that a narrow policy focus confined to the product of conventional economic analysis over a one to two year horizon can miss very important developments in the financial sector and asset markets, which often play out over longer horizons but which can have major economic implications …

So where does this leave us? I believe it should leave us trying to think about outcomes and risks, and policy settings which seek to manage those risks, over a horizon a bit longer than is common in much discussion of economic policy. Is this a departure from our long-established medium-term, flexible approach to inflation targeting? Definitely not. In fact, it dovetails quite well with the long-held view that policy should not respond solely to the inflation forecast at some fixed horizon and ignore other considerations. All that is new is that there is an additional dimension to the general rationale to maintain, and on occasion to use, the flexibility the system has always had.’

NSW Govt – 2004 mini-budget announcing Vendor Duty

NSW Government presented a mini-budget which included changes to land tax and the imposition of a vendor duty on investment properties.

RBA – SMP

‘With the heat now coming out of the credit and housing markets, this risk [of a damaging correction] has diminished over recent months. Housing finance approvals … [are] still a[t] very high level[s] and will need to fall much further to bring the growth of housing credit back to a reasonably sustainable pace.’ p 3

‘While this factor [the overheating housing market] was not the principal driver of policy, it had been an important reason to avoid unnecessary delay in moving the cash rate back up to a more normal position.’ p 3

RBA – Speech – Deputy Governor: Economic Conditions and Prospects: June 2004

‘… we have been worried about the housing market as an asset market, and about the borrowing behaviour of participants in that market. The concern was not out of a desire to target house prices, but more over the potential risks to macroeconomic stability from a major boom – and possible bust – in the household sector's main asset class.’

RBA – Governor – Testimony to House of Representatives Standing Committee on Economics, Finance and Public Administration

‘As the fall in prices becomes widely known, it should allow potential house purchasers to take their time … It should also enable them to resist the blandishments of the banks, brokers and other commission agents plying them with offers of seemingly generous quantities of credit. It should also reinforce the recent tendency of investors to question the assumption about easy capital gains.’

‘When the public recognise that prices are going down rather than up—as they are recognising because they are reading it more and more in the papers—I think it should affect their behaviour.’

NSW Govt – Vendor duty came into effect

Introduction of 2.25 per cent vendor duty on the sale price of investment property when the sale price exceeds the purchase price by more than 12 per cent.

ACCC – Action against Vision Pursuit for deceptive conduct

Action against Vision Pursuit for misleading or deceptive conduct in promotion of property investment.

RBA – SMP

‘The overheating in the housing market last year carried the potential to destabilise the broader economy, the more so the longer it continued.’ p 3

‘There has also been an easing in the demand for housing finance, particularly from investors, though this will need to adjust further if the growth of housing credit is to return to a reasonably sustainable pace.’ p 3

RBA – SMP

‘The adjustment to date has been an orderly one, so that the risk of an uncomfortably sharp decline in house prices does not appear to be large, though equally there does not appear much risk of a renewed upsurge at present.’ p 3

NSW Govt – Vendor duty abolished

Vendor duty abolished