Curbs on mortgage lending work: RBA paper

Colin BrinsdenAAP
Property prices rose 13.5 per cent nationally in 2020/21, the highest growth rate since 2004.
Camera IconProperty prices rose 13.5 per cent nationally in 2020/21, the highest growth rate since 2004. Credit: AAP

The Reserve Bank of Australia says past measures to curb a deterioration in lending standards at a time of a housing price boom have been successful.

Australia’s financial regulators, including the RBA, having been closely monitoring developments in the housing market for some months as home prices recorded strong gains across the country, not just in big cities.

In the 2020/21 financial year, property prices nationally rose 13.5 per cent, the highest growth rate since 2004.

The central bank has repeatedly said it won’t step in to curb activity by hiking the cash rate, but at the same time has warned that it doesn’t want to see a deterioration in lending standards.

Instead, it has referred to previous episodes when the banking regulator has used so-called macroprudential measures to stem what they consider to be riskier loans, particularly to investors.

In a new research paper, the RBA looks at when the Australian Prudential Regulation Authority implemented two credit limits between 2014 and 2018.

“The broad aim of macroprudential policy is to manage systemic risk in the financial sector,” the report released on Monday says.

“Our results suggest that these macroprudential policies achieved their stated aims and contributed to a reduction in risk in the financial system.”

The first policy, announced in late 2014, required banks to limit their annual growth in investor mortgages to no more than 10 per cent.

The second policy, announced in early 2017, required banks to limit their lending in interest-only mortgages to no more than 30 per cent of their total new housing lending.

The RBA said while there was a lag of two quarters in implementing the first policy, due to different interpretations by the banks, these challenges were largely overcome by the time of the interest-only policy was introduced, which had an immediate effect.

“Our results show that, despite some initial difficulties and unexpected effects, banks reacted by reducing growth in risky types of lending targeted by the regulator,” the report says.

However, it is questionable whether APRA will need to react to the current housing price boom, and there was nothing in the minutes of the RBA’s most recent board meeting to suggest action was imminent.

In a recent interview, the boss of the nation’s largest bank, the Commonwealth Bank of Australia, said the expected contraction in economic growth in the September quarter due to lockdowns in NSW, Victoria and South Australia could slow the housing market.

“But given the strength of the housing market, particularly over the last 12 months, which has defied expectations and forecasts, I don’t think that is necessarily a bad thing in the near term,” Matt Comyn told ABC radio.

New data from CoreLogic also showed fewer homes were taken to auction in the past week with half of the population in lockdown.

There were 1849 homes taken to auction across the combined capital cities over the past week, down from the 2153 originally expected.

Over the previous week, 2097 auctions were held.

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