Big news: Melbourne house prices are rising again...

This accords with our March 2020 projection for a mild 0 per cent to 5 per cent six-month correction, following which we argued prices would start appreciating again.

The official record is that across all metro- and non-metro regions, house prices declined just 1.7 per cent during the COVID-19 shock. Within the eight capital cities, the peak-to-trough loss was a similarly modest 2.8 per cent.

Needless to say, the resilient Australian housing market has once again called into question analysts’ (and investors') forecasting abilities, comprehensively burying the many hyperbolic bears who during this incredibly mild downturn have whipped themselves up into an apocalyptic lather.

The nascent recovery has been gradual, with no hint whatsoever of a bubble brewing, although we project that it will pick up at a nontrivial pace in 2021 with total capital gains in the next phase of the cycle of at least 10 per cent to 20 per cent.

The good news for regulators is that house prices have not registered a net increase in four years. Debt serviceability is also the best it has been in a long time.

According to the Reserve Bank, interest repayments on residential mortgages as a share of total household incomes are just 5.3 per cent, which is the lowest they’ve been since March 2002.

In New Zealand, the central bank has indicated it may roll out macro-prudential constraints once again on higher-risk lending if the housing market gets ahead of itself.

The Australian Prudential Regulatory Authority and the RBA will do the same here if there is any sign of a bubble brewing. And they now know with high conviction that these macroprudential controls work: APRA’s efforts to dampen exuberance in Australian housing ultimately triggered a 10 per cent correction in prices between 2017 and 2019.

There are reports that non-bank lenders want to access the same funding costs as Australia’s highly regulated and overcapitalised banks.

Supposedly the non-banks would like the Treasury to offer them the same, ultra-low 0.1 per cent cost of capital banks can capitalise on via the RBA’s $200 billion Term Funding Facility.

This is a silly suggestion. If a non-bank wants to be treated by the government on the same terms as a bank, it should become one. The non-banks have every opportunity to apply for a banking licence with APRA. But they typically do not because of the huge regulatory and capital burden that a coveted banking licence carries.

There is a reason why we have historically avoided the illiquid bonds issued by non-banks, including their residential mortgage-backed securities (RMBS): relative to what we see inside the banks, it is hard to get comfortable with the credit risk assessment processes of these lightly-regulated entities that originate loans to then sell (or securitise) them.

If you hold a loan on your balance sheet, as banks do, until its maturity – rather than offloading it to investors – you tend to be far more focused on the long-term risk of that loan going into default. That was certainly the lesson bequeathed by the GFC vis-a-vis the originate-to-securitise model.

Read my full column here.

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