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Reserve Bank notes increased housing activity, despite weak investment levels

On October 6, the same day as the Federal Budget was announced, the Reserve Bank Board met and decided not to change the cash rate.

Minutes for each monetary policy meeting are published two weeks later, and explain the decisions made.

During the October 6 meeting, commercial property risks were discussed, as were unemployment rates for renters and mortgage holders, and the amount of deferred loans.

“Risks for some types of commercial property were high, as declining demand had increased the chance of falling property values,” the Board noted in the minutes.

“Retail property vacancy rates had been rising prior to 2020 because of structural changes in the retail sector. Efforts to contain the spread of the coronavirus had accelerated this trend in the first half of 2020.

“Office vacancy rates had also increased given the decline in economic activity, although this had been from low levels of vacancies, particularly in Sydney and Melbourne.

“Nevertheless, an increase in office supply coupled with uncertainty about future working conditions (and therefore office demand) increased the risk of falls in office property prices, particularly for secondary-grade buildings.

“Members noted that demand for industrial property had been strong prior to the pandemic, driven by increasing e-commerce, and that, if anything, this had since been reinforced.” the minutes explained.

Members further noted that the banks’ direct exposure to commercial property risk had declined since the GFC, although they also acknowledged the uncertainty about indirect exposures “through lending to non-banks that subsequently lent to property investors, as well as the use of commercial property as collateral for business lending”.

Government payments were noted as providing an increase in income for a number of renters, with the Board comparing the current situation favourably with the early 1990s recession.

They note how the unemployment rate in the early 1990s had increased by less for households with mortgages than for renters, while in 2020 the unemployment rate had increased by a similar amount for both types of households.

“The unemployment rate for households with mortgages, nevertheless, remained lower than for renters,” the Board added.

Repayments were deferred on roughly 7 per cent of housing loans, a slight decline from the peak earlier in the year.

“Loans with a repayment deferral were more likely to have a higher loan-to-valuation ratio and to have been extended to those employed in industries relatively more adversely affected by the pandemic,” the Board noted.

“Demand for housing had moderated slightly, with only relatively small falls in housing prices in Sydney and Melbourne.

“Housing prices had increased in all other cities in September. Most borrowers for housing had large amounts of equity in their properties, with only 3 per cent of borrowers estimated to have negative equity.

“Growth in credit for owner-occupied housing had remained steady in recent months. Commitments for housing loans to owner-occupiers had picked up further in August across all states, consistent with a general increase in activity in the housing market.

“By contrast, credit to investors in housing had remained weak, although it had stopped declining in August. Following an earlier tightening in response to the pandemic, more recently constraints on the supply of housing finance had eased slightly.”

Read the minutes here.

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