Reserve Bank board discusses home lending limits
For the first time, Reserve Bank board members have admitted to considering the application of home lending limits in Australia.
Minutes from the latest board meeting in March released today, show some concern that rising house prices and home lending had the “potential to encourage speculative activity.”
While the RBA said there was little sign of lenders lowering standards to attract mortgage customers, it warned that recent momentum in household borrowing behaviour “warranted close observation.”
“Lending to housing investors had been increasing for some time in New South Wales, and over the past six months it had also picked up in some other states,” the board observed in minutes of its meeting.
In this context, the board turned to a discussion of so-called macroprudential policies, which can include limits on the size of loan a bank can issue relative to the value of the property, income of the borrower, or both.
“Members discussed the experience in other countries where macroprudential tools had been utilised to slow demand for established housing and their possible application in Australia,” the minutes read.
A notable example is New Zealand’s introduction of cap on the number of loans banks can issue where the purchaser has a deposit of less than 20 per cent.
However, RBA board members probably also discussed a Bank of International Settlements (BIS) which indicates that loan-to-value limits (such as New Zealand’s) are not as effective at halting dangerous lending growth as stricter loan-to-income tests that force banks to factor in a higher interest rate safety buffer when testing the ability of borrowers to make repayments.
Around a week-and-a-half ago, the Reserve bank Governor Glenn Stevens and his deputy Philip Lower told a federal parliamentary committee that making banks implement stricter ‘stress tests’ on their potential customers, with bigger interest rate buffers, had been examined by RBA staff.
They, like the BIS, concluded that such measures would probably be preferable to a New Zealand-style cap to limit high loan-to-value lending.
Alternative to rate rises
As with New Zealand’s central bank, which explicitly said it was introducing lending limits so that it could delay lifting interest rates, it is likely the Reserve Bank here is keeping open the option of stricter lending rules as an alternative to rate rises if it does need to cool a potentially overheating housing market.
Unlike a rate rise, which affects business and personal borrowers as well as mortgage customers, a loan limit could be targeted solely towards the housing market.
Although, at this stage, some analysts think the RBA is bluffing banks and property investors by warning of the macroprudential sticks it has if lending standards deteriorate and property prices keep surging.
“We suspect this is more jawboning and essentially a warning that these tools could be deployed if financial risks escalated,” hypothesised Citi’s economists, Paul Brennan and Joshua Williamson.
More indications of the Reserve Bank’s thinking should be outlined in its half-yearly financial stability review, to be released next week on Wednesday.
However, macroprudential policies would seem to fit in well with the RBA’s stated preference to leave interest rates on hold for an extended period, which was reiterated in the minutes.
The bank says record low wages growth, albeit in data that only go back to the late-1990s, should put downward pressure on inflation, offsetting the upward prices pressures that have been caused by the fall in the Australian dollar.
That should keep inflation within the 2-3 per cent target band over the medium term, and allow the RBA to leave interest rates at record lows for an extended period.
On the currency, the bank has again described the Australian dollar as “high by historical standards”, implying that it would be more comfortable with it falling back below 90 US cents and staying there.