RBA refocuses on need for strong lending standards

by Miklos Bolza05 Apr 2017
The Reserve Bank of Australia (RBA) has expanded its scope of considerations when making its monthly cash rate call with its latest monetary note making a mention of household borrowing.

The pace of growth in household borrowing, which is largely used to purchase property, was one of the key factors the RBA took into account when holding the cash rate at 1.5% yesterday (4 April).

While the Bank noted that recently announced supervisory measures would help address the risks caused by increasingly rising levels of indebtedness, it called upon the banks and non-banks to take further action.

“Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions. A reduced reliance on interest-only housing loans in the Australian market would also be a positive development,” the RBA said.

With rate increases by lenders, particularly in the investor space, the Reserve Bank said that Australia’s financial institutions remained in a good condition to lend.

The additional focus on household borrowing was not a surprise, said Harley Dale, chief economist at the Housing Industry Association (HIA).

“The RBA was always likely to beat its drum today on the need to reinforce strong lending standards in the Australian housing market. The Bank has had its eye on the situation for a considerable time.”

In its note, the Reserve Bank also pointed out that housing market conditions varied dramatically from region to region across Australia with prices in some markets rising while others fell.

Dale warned that these variations required stricter measures than those presented by the Australian Prudential Regulation Authority (APRA) last week.

“The RBA itself recognises in today’s statement that conditions in the housing market vary considerably around the country,” he said.

“The application of stricter lending standards to geographical areas, types of buyers or housing product that do not represent any risk to financial stability would exacerbate the prospect of an impending downturn in new home construction being larger than would otherwise be the case.”

This would present the RBA with an additional problem that it did not really need, he said.

Related stories:

APRA mandates 30% limit on interest only resi lending

Tighter lending restrictions could backfire

Rate rises real risk for mortgage holders