The Abbott Government’s financial systems inquiry head David Murray says Australia needs to introduce limits on borrowing.
The caps are needed to slow down house-price growth and avoid any further risks to the financial system.
Mr Murray says the extended period of low interest rates has caused house prices in the capital cities to rise and it was making housing unaffordable while also posing a risk to the entire financial system.
“It is a serious issue and if interest rates continue to fall, there will have to be prudential offsets to limit the risks in the housing market,” he said.
Mr Murray said putting a flat-out cap on borrowing was not the only technique that could be used.
“There’s different ways it can be done; in other countries they’ve limited the loan-to-value ratios for second properties.”
“Singapore and Hong Kong have done that, for example, but the lower these rates get, the more governments will have to consider the responses.”
There’s little doubt the Reserve Bank is concerned with the property market becoming overheated and it was reflected in their announcement this week of interest rates remaining unchanged despite the continued sluggish or indeed slowing economy.
The RBA is working with the Australian Prudential Regulation Authority (APRA) and other agencies to tackle the issue and one option is to place limits on how banks lend.
Mr Murray’s report is in the hands of Federal Treasurer Joe Hockey, and in it he also criticised the negative gearing tax break that stimulates household borrowing for property investment.
Mr Murray suggests restricting the tax break to ‘neutral gearing’ where a property has the same amount of money being paid in interest as is received in rent.
“I tend to think if real estate is a favoured asset it gets more than its fair share as a consequence of negative gearing,” he said.
The comments from Mr Murray come after large mortgage broking firm AFG reported a rise in home loan sales to $4.3 billion in February – a jump of 16 per cent from last year – indicating a surge in lending growth since the February rate cut from the Reserve Bank.