RBA prepares to further restrict mortgage lending

by Miklos Bolza15 Mar 2017
In her first speech as assistant governor of financial system at the Reserve Bank of Australia (RBA), Michele Bullock has said that regulators will be willing to do more to reduce risk in the mortgage industry.

At the Bloomberg Breakfast on Tuesday (14 March), Bullock talked about the history of prudential lending in Australia and what occurred after 2014 when the regulators implemented targeted action against risks in the residential housing market.

“There was very strong demand for residential housing loans, particularly by investors. Price competition in the mortgage market had intensified and discounts on advertised variable rates were common,” she said.

“There also seemed to be a relaxation in non-price lending terms. The share of new loans that were interest only was drifting up and the growth of lending for investment properties was accelerating. Unsurprisingly in this environment, the growth in housing prices was strong, particularly in Melbourne and Sydney.”

The Australian Prudential Regulation Authority (APRA) thus decided to tighten a number of aspects including bringing in its 10% investment lending speed limit and setting some more prescriptive guidelines around serviceability assessments.

These actions succeeded in addressing some of the risks, Bullock said.

“Nevertheless, the early experience suggests that, while the resilience of both borrowers and lenders has no doubt improved, the initial effects on credit and some other indicators we use to assess risk may fade over time. We are continuing to monitor their ongoing effects and are prepared to do more if needed.”

Bullock said that more needed to be done around ensuring monetary policy factored into financial stability issues. The role of macroprudential policies could also play a role in addressing system-wide risks especially in today’s low interest environment, she said.

“While the basic way we look at financial stability has not changed, experience with the GFC reinforced the need to focus on system-wide issues. We need to spend time analysing them and thinking about whether policy responses might be required. We are still learning how best to do this.”

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