The great Australian dream … but the housing market remains tight and prices high. Photo: Peter Braig

ANALYSIS

WHEN the chief executive of the Commonwealth Bank, Ralph Norris, recently caught up with investors in New York, talks soon turned to the topic of the heady Australian housing market.

After a correction in housing prices around the world, Australia and Hong Kong remain the standouts where housing markets are booming.

For the investors in the nation’s banks – particularly the Commonwealth Bank and Westpac, which are the most exposed to the housing market – the prospect of a correction in prices is nerve-racking.

Home owners no doubt welcome rising property values, but overheated markets bring about other dangers. The biggest is that asset bubbles face a real risk of popping, as seen in the US and British housing markets, which can also lead to pain for overextended owners.

At the same time high prices and low rental yields act as a disincentive to increase the supply of rental properties, while would-be home owners are priced out of the market.

For now, it seems, Australian prices remain supported, given the tight supply of housing stock.

The Reserve Bank’s assistant governor for economics, Philip Lowe, said yesterday that if population growth remained strong, more of the economy would need to be devoted towards housing, presenting challenges both to labour markets and governments.

If this does not happen, he warned, Australian house prices could be pushed even higher.

Home prices surged 13.6 per cent last year, spurred on by a strong economy and robust population growth. Bottlenecks in new home construction have curtailed supply, adding to price pressures.

”We’ve got this situation in Australia which is being driven by very strong demographics, very rapid growth in population we’re seeing at the moment and of course supply has failed to keep up and we’ve seen the outcome there in the way house process are moving,” the chief economist at the Commonwealth Bank, Michael Blythe, said.

However, Mr Blythe believes Australia is ”on the verge” of a significant supply response which will cool the pace of price growth.

Despite yesterday’s deeper than expected drop in housing finance applications, Mr Blythe said the bank’s own figures showed lending to housing construction (rather than for acquiring existing dwellings) has been rising very strongly, suggestion there is a ”major lift” in residential construction looming.

Over the medium term it looks like commercial banks will be playing more of a role in the availability of credit, with regulators planning a swag of new rules aimed at making them safer by forcing them to improve the quality, as well as levels, of capital they hold.

In his recent visit to Australia, Jaime Caruana, the head of the Bank for International Settlements, which is overseeing global rule changes for banks, said capital requirements were the ‘’speed limits” of lending.

Essentially a requirement for banks to hold more capital and more liquid assets would make it tougher to lend to high-risk borrowers, while also restricting the overall capital valuable.