Are Housing Risks On A Downswing Now?

  • Sep 24, 2019 AEST
  • Team Kalkine
Are Housing Risks On A Downswing Now?

The Australian housing market has been a hot topic for quite a long time now, with some frequent developments in the market continuing to hold investors? attention.

The property market of Australia has been following a trough and crest pattern, showing some signs of revival in recent months. The hopes of recovery in the property market emerged after some stabilisation in housing market conditions emerged during August 2019.

Although Australia witnessed a massive fall in housing prices during June quarter 2019, August?s dwelling price data was relatively impressive.

As per CoreLogic?s monthly home value index, the property prices improved by 0.8 per cent in August, with an improvement in Sydney and Melbourne property prices by 1.6 per cent and 1.4 per cent, respectively.

According to the RBA, the housing prices in Sydney and Melbourne rose remarkably in August, along with an increase in auction clearance rates. Consistent with the signs of stabilisation in the established housing market, the housing loan approvals to both investors and owner-occupiers rose for the second successive month in July.

Council of Financial Regulators? View on Australian Property Market

In the recently released Quarterly Statement, the Council of Financial Regulators (CFR) mentioned the risks faced by the Australian financial system, which includes the turbulence in the Australian Property Market.

As per the Council, although the loan approvals have picked up recently, the housing credit growth has been soft, especially growth in credit to investors. The major banks of Australia observed slower growth relative to other lenders, primarily due to weaker credit demand.

On the property prices front, the Council noted the possibility of risks to financial stability from declining dwelling prices in the country. According to the Council, though the housing prices in Sydney and Melbourne have risen in the past few months, the prices have continued their prolonged decline in the Northern Territory and Western Australia.

The fall in property prices has increased the prevalence of negative equity for borrowers in those regions. Also, CFR observed persistent difficult credit conditions for small enterprises, with modest increase in credit due over the past year.

An Insight into CFR?s Quarterly Statement

There were certain other aspects that were touched upon by the Council in its recent Quarterly Statement, which are as follows:

Let us discuss each one of them in some detail below:

Superannuation Fund Liquidity

The Council noted that arrangements for handling liquidity at superannuation funds during times of market stress had operated as expected during the financial crisis and had since been reinforced.

The Council members agreed that the current arrangements offer a suitable incentive for superannuation funds to cope with their liquidity, and it is highly unlikely that a situation of systemic liquidity problem would arise.

Policy Developments

The Council members acknowledged the initiatives taken by APRA?to fortify remuneration requirements across all APRA-regulated entities.

In July 2019, APRA notified about the formation of a new prudential standard for simplifying and bolstering remuneration requirements in its regulated entities. APRA proposed minimum deferral period for bonuses, the cap on executive bonuses and imposition of stringent conditions on executive pay policies to enhance accountability in the financial sector.

As per the Council, the proposed remuneration requirements were targeted at the better alignment of remuneration frameworks with the sustainable interests of organisations and their stakeholders, and was an attempt to include a recommendation from the Banking Royal Commission on restricting remuneration centred on financial metrics.

Stored-Value Payment Facilities

CFR notified that a report, proposing an amended regulatory framework for payment providers that maintain stored value, will be provided to the Government soon. The revised framework seeks to lessen the complexity of current regulation while offering satisfactory protection for consumers and the resilience to accommodate innovation.

Financial Market Infrastructure (FMI)

The Council informed that a package of suggested regulatory reforms for FMIs is likely to be released for consultation later in 2019. Subsequent to the consultation, CFR will present its judgments to the Government to help with the legislation drafting and policy design.

The members of the Council discussed key elements of the package that included some adjustments to the resolution framework and supervisory structure for clearing and settlement facilities.

The Council highlighted that the package will strive to restructure and modernise supervisory powers of regulators and offer new powers to settle a disturbed clearing and settlement facility in the domestic region.

Stablecoins

The Council examined some possible policy consequences of ?stablecoins? and related payment services, especially those associated with huge and established networks.

A stablecoin is a form of crypto asset that has been created to sustain a stable value compared to another asset, usually a unit of a commodity or a currency.

Members noted that the Australian regulators would be required to think about any international regulatory frameworks that could eventually be formed for stored-value facilities.

Many Australian regulators and Council agencies are cooperating on their analysis of stablecoins. The members emphasized on the advantages of having a technology-neutral, flexible regulatory regime addressing these and additional innovations.

Banks' Offshore Funding

The Council appreciated the progress made by the Australian banks in extending the maturity of their offshore term debt throughout the last few years.

The members considered the IMF's recent recommendation of encouraging a reduction of banks' use of offshore funding by the Australian regulators and an extension of the maturity of their borrowings.

They observed that the Australian banks handle their risks from offshore borrowing via holding foreign currency liquid assets and currency hedging, and that there are many other factors alleviating the risks.

As per the Council, an additional extension of the maturity of banks? offshore borrowing would lower the banks? rollover risk and the extensive financial system.

Cyber Security and Crisis Management

The members of the Council evaluated the work focused on crisis management and cyber security that is currently underway and planned by working groups.

The members highlighted that the alignment of financial sector efforts with broader initiatives will be one of the key focus of cyber security work in the period ahead. This includes the Government's 2020 Cyber Security Strategy and the initiatives of the Australian Cyber Security Centre.

It can be inferred that all the issues discussed by the Council were in line with its objectives to support efficient and effective regulation by the financial regulatory agencies of Australia and to promote stability of the Australian financial system.


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