Interest rates are very low and the exchange rate is providing stimulus. The Australian dollar in trade-weighted terms is the weakest since coming out of the financial crisis in 2009.

In addition, all previous periods of declining house prices, with the exception of in 2004, were associated with significant slowdowns in public demand. Yet since 2015 demand has been growing at between 4 per cent and 6 per cent. With the federal budget on the verge of returning to surplus, spending could strengthen even further. Direct bottom-up support for the housing market is not difficult to envisage.

Indeed, because balance-sheet-driven downturns in the economy are so potentially damaging and typically long lasting, further extended house price declines are likely to increasingly justify policy action.

We are already seeing some movement. In December APRA removed the interest-only lending restrictions introduced in March 2017.

But more broadly, as bottom-up prudential standards tighten, some of the standards that essentially provided top-down insurance on the lending process could be loosened.

There is precedent for this.

Some winners

Earlier in 2018 APRA removed the benchmark on investor lending, subject to banks meeting more stringent bottom-up lending standards. Another example might be the mortgage interest-rate buffer introduced in 2014 which mandates an interest-rate floor of “at least” 7 per cent compared with current variable mortgage rates at 5 per cent. The floor seems to have been based on the idea we are in a historically anomalous “low-interest-rate environment”.

However, as time passes historical precedent seems less and less relevant, as has been the case in many other economies post-GFC. A 200bp increase in interest rates seems untenable in the current cycle, let alone anything materially larger.

The irony is by continuing to impose such a strong top-down prudential standard at the same time as bottom-up standards are tightened, APRA is making any meaningful increase in interest rates much less likely.

There are some winners from house-prices decline – first-home buyers an obvious one. That activity has picked up sharply since 2017 and now makes up nearly a fifth of finance approvals.

There are also plenty of home owners who don’t watch every ripple in the housing market. A third of households have no mortgage and a third of those with mortgages are more than two years ahead of their payments. For them, jobs and wages are much stronger drivers of their behaviour.

On this basis there appears to have been little forced selling, at least in a macro sense. While much has been made of the increased number of properties for sale, this reflects the slow pace of sales for existing stock rather than a rush of new stock coming to market. CoreLogic data shows new property listings were down over the past year in Sydney (-10.9 per cent) and Melbourne (-17.3 per cent).

Provided prudential standards are correctly calibrated for the tightening in bottom-up standards, forced sellers in the housing market shouldn’t be sufficient to turn what really has been a textbook adjustment so far into something much worse.

Richard Yetsenga is chief economist of the ANZ Banking Group

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