Australia: Market reaction to macro prudential policies - Westpac

With housing central to market debate, analysts at Westpac are looking at recent supervisory developments and market implications on the Australian markets with housing as the central theme.

Key Quotes

“The Australian housing market remains central to policy and political debate. In aggregate, housing markets could be described as robust, although there is notable east coast/west coast divide, with sentiment and price measures diverging widely by state. Victoria’s government recently announced several policy measures to address housing affordability, and there is discussion that the federal government will also announce housing affordability measures in the upcoming May Budget.” 

“This week’s RBA statement commented that “Supervisory measures have contributed to some strengthening of lending standards.” Which could be argued is slightly milder than February’s commentary when RBA noted “With leverage increasing, supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments.”

“Rate cuts have proved effective at stimulating prices and credit, even at the prevailing low levels. Globally, macro prudential policies have become more prevalent in recent years and evidence from other countries suggests that macro prudential policies tend to be cumulative and rarely do we see a tightening in isolation.”

“In isolation, lending policies won’t change the domestic outlook, but if Bill is right and we do see more explicit tightening in macro-prudential policies, and/or further independent rate hikes and tightening in lending standards, then this could be a factor allowing the market to price a longer period of stability, analogous to the 2015 period.”

“With the Fed’s next hike looming, this is not a theme for the next week, but with a longer time horizon, we maintain our view that the Aussie front end is cheap relative to domestic considerations. 3yr bonds are already trading at 60+bps to cash, in an environment in which the RBA again confirmed this week that it is unlikely to shift policy in either direction for the foreseeable future.”

“Global outcomes may stretch valuations further, and the opportunity to buy into current levels at the front end will not arise until after the FOMC likely delivers its hike next week. At that time we will have a better idea of new trading ranges but also positioning.  Furthermore, given Bill’s view that the risks to rates in 2018 is to the downside rather than the upside (as per current market pricing), then we will keep monitoring price action for an appropriate signal to enter front-end carry trades such as 6m-3y flattener and recieve 1y1y.”