AFR Article 23 September 2021 page 3
The Reserve Bank of Australia has warned it may be necessary to clamp down on household debt to income levels as growing debt driven by booming property prices could increase the risk of financial instability.
The central bank is finding it hard to judge in real time whether prices are out of line with market fundamentals, and said the macro-financial risks posed by growing household debt warranted close attention.
“Sharp rises in housing prices that are not associated with fundamentals could lead to instability by raising the risk of a subsequent decline,” RBA assistant governor Michele Bullock said in an online speech yesterday.
In other words, if there is a bubble in house prices, it could pop.
“Whether or not there is need to consider macro-prudential tools to address these risks is something we are continually assessing,” Ms Bullock said. However, she gave little indication the RBA believed an intervention was necessary at this stage.
The consequences of higher household debt could make the economy more susceptible to downturns if there was a shock to incomes or house prices, Ms Bullock said, but at the same time she acknowledged the strong property market had been a key economic support in the COVID-19 crisis.
But although banks had strong balance sheets and lending standards were currently being maintained, she said, “with the increase in housing prices and housing debt, risks to financial stability could be building”.
Ms Bullock said, given the potential for growing risks, there was an open question about what authorities could do aside from sit and watch.
Noting that housing credit was growing at an annualised rate of 7 per cent and could reach 11 per cent by early next year, the RBA views the risks as broader than previous high-growth periods driven by investors.
Investor loan commitments reached about $9.3 billion in July, according to the latest Australian Bureau of Statistics lending indicators, the highest level since the peak of the last housing credit boom in April 2015.
But the build-up in growth has been sharper over a shorter period than in the past and has coincided with a large increase in owner-occupier lending supported by record-low interest rates and government stimulus programs.
Investor loans made up about 30 per cent of the value of commitments in July 2021, compared with close to 50 per cent in April 2015.
The growth in investor lending over 2014 and 2015 prompted the Australian Prudential and Regulation Authority to introduce a 10 per cent speed limit on investor loan growth known as a lending benchmark.
Ms Bullock said that while it had been picking up in recent months, investor activity in the housing market was currently nowhere near the level it was in 2014 when the lending benchmark was introduced.
“Nevertheless, when prices are rising very rapidly and there are expectations that this will continue, borrowers are more likely to overstretch their financial capacity to purchase property,” she said.
“We are therefore watching developments in housing markets and credit very closely.”
In the event the regulators felt it necessary to intervene to slow credit growth and lower the risk of financial instability, Ms Bullock said, the current mix of lending meant previous measures would not be appropriate.
