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Regulators seeking to avoid housing asset bubbles

by Paul Lahiff2 minute read

Over the past three to four months, an emerging trend has developed across a number of countries trying to avoid a housing crash.

Historically low interest rates and scepticism about the sustainability of equities markets have seen an explosion in mortgage lending.

Mindful of the pain the US housing collapse created in 2008, regulators are endeavouring to slow the pace of mortgage lending, particularly the more speculative elements of it.

Instance the following:

  • New Zealand has placed a cap of 10% of new housing lending to mortgages with a loan to value ratio of 80% and above; the Reserve Bank of New Zealand describes the initiative as an “LVR speed limit”
  • The Bank of Israel has issued new rules which require monthly mortgage repayments to be no more than half of a borrower’s household income
  • In the Netherlands, the local regulator has determined that only 50% of a mortgage can be financed by an interest-only loan (formerly it was 80%)
  • The Canadian central bank has placed an $85bn cap on residential mortgage backed securitisation issuance
  • Hong Kong has increased the capital risk weighting on residential mortgages to 15%; doubled the sales tax on residential property sales; and tightened the stress test requirement for borrowers seeking mortgage finance
  • The Monetary Authority of Singapore has introduced a total debt servicing ratio limit of 60% of disposable income which can’t be exceeded as well as tightening the loan to value ratio for borrowers buying second and third properties

Relevant to Australia? Highly unlikely in the short term, but it is interesting that the traditional method of increasing interest rates to slow down lending by central banks is regarded as too risky given the fragile nature of most economies and is being replaced by more direct regulatory initiatives.

paul lahiff

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