RBA: New tools could temper the risks of financial instability

Macro-prudential tools targeted at highly indebted borrowers should be considered if a booming housing market heightens the risks of financial instability, according to Assistant Governor (Financial System) at the Reserve Bank of Australia (RBA).

In an online address yesterday, she noted that the Australian Prudential Regulation Authority (APRA) had stepped in to bolster lending standards and curb the growth in lending that was posing higher risks to financial stability between 2014 and 2017 when housing prices and debt were rising.

“Unlike in 2014 and 2017, the concerns this time are not specific types of lending such as investor or interest-only lending. So, the tools used at that time are not really appropriate at this time,” she said.

“This suggests that if there were to be a need for so-called macro-prudential tools to address rising risks, they should be targeted at the risks arising from highly indebted borrowers.

“Tools that address serviceability of loans and the amount of credit that can be obtained by individual borrowers are more likely to be relevant. Indeed, we have seen such tools used in a number of countries in recent times and they could be employed in Australia should the circumstances be judged to warrant it.”

Bullock noted: “Even though the banks have strong balance sheets and lending standards are being maintained, there is a risk that in this environment, households will become increasingly indebted.

“A high level of debt could pose risks to the economy in the event of a shock to household incomes or a sharp decline in housing prices. It is these macro-financial risks that warrant close watching.”

Whether or not there was a need to consider macro-prudential tools to address these risks was something the RBA continually assessed, said Bullock.

But she added: “It is hard to judge in real time whether housing prices are out of line with fundamentals.”

Bullock noted that housing prices had recovered strongly after initially declining a bit at the onset of COVID-19.

“In this environment, it is unsurprising that housing credit growth has picked up and the rapid rebound in loan commitments suggests some further pickup in growth to come,” she said.

“Growth in housing credit is currently running at an annualised rate of around 7 per cent. Recent data on commitments, combined with several assumptions, suggest housing credit growth could peak at an annualised rate of around 11 per cent early next year.”

Bullock noted that the share of new lending at high loan to valuation ratios rose last year, in part reflecting an increase in the number of first home buyers who tend to have lower deposits. “Lending at high debt to income ratios has also risen since early 2020. APRA and the RBA are monitoring these trends closely.”

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