The Reserve Bank of Australia is considering using macroprudential tools to help manage the housing market.
At this month’s monetary policy meeting, RBA
board members discussed the experience in other countries where macroprudential tools had been put in place to slow demand for established housing and their possible application in Australia, recently released minutes showed.
The board noted rising housing prices and household borrowing were expected from the monetary easing, but while these factors help support residential building activity, they also could encourage speculative activity in the housing market.
“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 notes said.
It signals the board may follow in the footsteps of the Reserve Bank of New Zealand in future.
In October last year NZ’s Reserve Bank governor Graeme Wheeler imposed limits on home lending on deposits of less than 20%. It seems to have cooled a tense property market, as restrictions on the level of low-equity home loans and rising mortgage rates have tempered demand in recent months, the Reserve Bank said earlier this month.
However, an introduction of macroprudential tools is unlikely to happen overnight. The board found recent momentum in households' risk appetite and borrowing behaviour warranted “close observation”, but agreed present conditions in the household sector did not pose a near-term risk to the financial system.
But Digital Finance Analytics
principal and analyst Martin North
thinks now is the time to introduce macroprudential tools to the Australian lending market.
“We have been arguing for some time that in Australia, we need to move beyond the brutish interest rate lever to something more sophisticated,” he said.
North thinks macroprudential policies should be employed to control the growth in lending.
He points to Bank of International Settlement research, which concludes whilst there may be some benefits in capping loan-to-value ratios – as New Zealand has done – the best mechanism to manage house prices is to target debt service to income ratios.
“The logic is because LVR controls won’t impact borrowing in a rising market – as house prices rise, borrowing can grow. On the other hand a debt service to income ratio is not impacted by rising house prices, so consumers would not be in a position to borrow any more even if house prices did rise. Therefore it is a more effective control,” he said.
The Australian Prudential Regulation Authority is in charge of overseeing ADIs in Australia and it would largely be their responsibility to implement and manage any macroprudential tools.