Could IMF caps pop the housing bubble?

The International Monetary Fund (IMF) released a paper this week calling for tighter lending rules and lower LVRs to be introduced globally to prevent banks from fuelling housing bubbles. With Auction clearance rates at record levels and the value of homes in major cities up 5.84% on last quarter, the Australian property market recovery may be in full swing but the latest from the IMF and APRA could tamper the flame.

It's clear that the effects of recent rate cuts are flowing through to more positive economic data. House lending volumes are on the rise as are the total value of dwelling commitments which rose 1.2% in June and continued to climb by 1.1% in July . According to RP data the value of homes across five capital cities are up 5.84% on last quarter.

In the report, the IMF put forward a range of 'macro prudential policies' designed to rein in excessive mortgage borrowing and questioned whether record-low interest rates would spark "potentially risky" property price growth. Two new rules on the table include LVR caps and caps on debt-to-income ratios designed to protect buyers from stretching themselves too thin on the promise of extremely low rates.

The IMF paper follows APRA's Loan Serviceability standards in housing lending report, released last week that claimed interest rates hikes are 'inevitable' and encouraging lenders to pay careful attention to their clients ability to service new loans in the long term. 

Citigroup economists Paul Brennan and Josh Williamson believe that immediate change off the back of the report is unlikely, "We doubt that APRA and the RBA are ready to announce controls on LVR's of housing loans, but APRA has indicated a desire to apply tougher standards on how banks assess lending risks."

Although it makes good sense to take advantage of the record low rates on offer right now, the takeaway message for consumers is that while low rates may be great while they last, the relief may well be temporary.

Borrowers will need to take a long term view to product choice so that when rates do increase they can still comfortably service their loan. Mozo's Home loan Rate Change Calculator is a great tool to give buyers an idea of how their repayment will increase when the honeymoon ends and rates begin to climb.