Could the RBA cap LVRs?

by Calida Smylie24 Mar 2014
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.


  • by Steve M 24/03/2014 9:28:41 AM

    That's one way to save on LMI! With top up personal loans rife in the new home market, many LVR's are understated anyway.
    When is someone in this forum going to investigate how these $3k deposit finance products actually work!!

  • by Harry Myers 24/03/2014 10:02:54 AM

    And the outcome in NZ has been less first home buyers getting into the market, an increase in rents as tenants have their options limited, a reduction in sales prices for vendors and fall off in activity across the board. Those low deposit buyers with enough income have just gone out and borrowed the shortfall in deposits or family have done it for them. The govt has been fiddling with housing for nearly 50 years now and the nett result being that they just make it more expensive no matter what they do.

  • by James 24/03/2014 10:11:52 AM

    Or they could reform the LMI rules..... The premiums are obscene and the percentage that is paid out is minimal. The LMI handcuff is far worse than the media ever acknowledges.