Australia's Housing Boom: more than half of all new loans are interest-only

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http://online.wsj.com/news/articles/SB10001424052702304027204579334520282787260?ru=yahoo?mod=yahoo_itp&mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304027204579334520282787260.html%3Fru%3Dyahoo%3Fmod%3Dyahoo_itpAustralia's Housing Boom Spreads Beyond SydneyPrices Fuel Debate Over Whether Central Bank Should Act

The housing boom in Australia, once thought to be limited primarily to central Sydney, is spreading to other parts of the country. Prices of land and houses are rising in numerous cities and suburbs, fueled largely by demand from both large and small investors looking for yield amid low interest rates engineered by the central bank to keep the economy growing.

Nationally, house prices rose almost 10% last year, the strongest gain since 2010, according to data released earlier this month by RP Data, a property research firm. Sydney saw the largest rise with a 14.5% increase, but prices were up 9.9% in Perth, 8.5% in Melbourne and 5.1% in Brisbane, the firm said.

But lately the bank has been keeping rates at a record-low 2.5% to aid an economy that is slowing as a decadelong mining boom fades. Australia sidestepped the global financial crisis largely because of the strength of its mining industry.

Still, the central bank is closely watching a sharp uptick in mortgage lending, particularly to people buying houses strictly as investments rather than as a place to live. A report from the Australian Bureau of Statistics last week showed the value of home loans approved in November rose to A$26.9 billion, a 15% increase from a year earlier.

Over 46% of the loans in November went to investors, compared with 43% a year earlier, according to AMP Capital, one of the country's largest fund managers. First-home buyers accounted for only 12.3% of the loan volume, the lowest level in more than two decades.

Australia's biggest banks have been competing for a bigger share of the mortgage business, waiving application fees and asking for down payments as low as 5% of purchase prices. Nearly a fifth of home buyers have put down as little as 10%, while more than half of all new loans are for interest-only mortgages, which are popular among investors.

Analysts say the growing role of investors is helping drive up prices. Some say this is a source of concern because investors are more likely than owner-occupiers to sell in a downturn.

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While monetary policy theoretically shouldn’t affect the exchange rate of a currency and its long-term trend, this cycle may be different, according to Bank of America Corp strategists.
As central banks in major advanced economies start to unwind the unprecedented expansion of their balance sheets, their exchange rates may be affected, London-based currency strategists Athanasios Vamvakidis and Myria Kyriacou wrote in a Jan. 22 report.
The combined balance sheets of the Fed, the European Central Bank, the Bank of England, the Bank of Japan and the People’s Bank of China have more than doubled to 33 percent of gross domestic product of their total economies from 14 percent since early 2007, they said.
“Unwinding this balance sheet expansion could take years, and is likely to affect both the actual and the equilibrium levels of exchange rates,” the strategists said.
Bank of America’s models suggest the Australian dollar is overvalued, while balance sheet changes will weaken the euro against the dollar for “years to come,” Vamvakidis and Kyriacou said. Models show the yen is currently undervalued, and could depreciate further as the Fed reduces its assets and liabilities and the Bank of Japan does the opposite, they predict.

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