Regulator action on house prices “overblown”

Adam Smith 11 April 2017

danger sign1A fund manager has claimed banking regulators’ concerns over the booming Australian property market are “overblown”.

Boutique fund manager Merlon Capital Partners has claimed in a new paper, Some Thoughts on Australian House Prices, that the risk to the Australian housing market is overstated. The paper has claimed that Australian house prices are 5-15% overvalued, but that the risk of “catastrophic collapse” is low.

“Regulations that have forced banks to ration lending are probably unnecessary and will achieve little other than improving short term bank profitability through higher interest rates for borrowers. In the long term, the RBA will take bank pricing decisions into account when setting official rates and unregulated lenders will emerge if market fundamentals remain sound,” the paper said.

In spite of weak rental growth, Merlon Capital Partners said dwelling rents were “notably resilient” and had showed the tendency to grow above inflation over the long term. And while Sydney’s price growth has been of particular concern to regulators, the paper claimed the city was catching up following a period of underperformance from 2004 to 2010.

“As with all our investing, we work on the basis that, over time, interest rates will revert back to long term levels as will aggregate housing valuation metrics. Against this, we think aggregate rents and household incomes will continue to grow which will cushion the overall impact on dwelling prices and that the exposure of the household sector to higher interest rates means that the time frame over which interest rates will rise could be quite protracted,” the paper said.

Image: Shutterstock

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