Michelle Bullock, Assistant Governor of Reserve Bank of Australia, said that although the strong housing sector has been a positive for the economy overall, credit growth that is more than income could lead to vulnerabilities.
Ms Bullock said that, unlike 2014 and 2017, there are no specific types or lending concerns like interest-only lending or investor lending.
“This suggests that, if so-called macroprudential tools were needed to address rising risk, they should be targeted to the risks arising out of highly indebted borrowers.”
Ms Bullock believes tools that address serviceability and credit limits are more applicable in current market conditions.
“A high level of debt could pose risks to the economy in the event of a shock to household incomes or a sharp decline in housing prices,” she said.
“It is these macro-financial risks that warrant close watching. Whether or not there is need to consider macro-prudential tools to address these risks is something we are continually assessing.”
What factors could lead to tighter lending policies
CoreLogic research director Tim Lawless also shared similar views on the subject, saying that although investment credit growth has increased, its average rate of growth is still below average.
“On one hand, owner occupiers credit growth has been trending higher from June 2020 and has remained over the decade average depuis November last year,” Mr Lawless stated.
According to data from the Australian Prudential Regulation Authority, 22% of the lending in the June quarter was for housing loans that had a debt-to-income ratio greater then six.
Lawless indicated that although there has been a decline in household debt since the peak in 2019, the ratio between household debt and annualised disposable household income was higher in the first quarter.
“Considering the pace of growth in housing credit against a backdrop of soft income growth, in all likelihood, household debt — of which housing debt is the primary component — will be at or close to record highs by the end of 2021,” he said.
What is the probable response?
Lawless suggested that there might be higher serviceability assessments for borrowers in order to address these risk.
He explained that this means that the minimum interest rate is increased when assessing whether a borrower will be able to service their loan.
“Or, portfolio-level restrictions could be imposed upon lenders. This would likely focussed on setting firm benchmarks for the amount of high-debt-to-income loans that can be issued.”
These options could have an effect on credit availability, and likely limit loan sizes relative to borrowers’ incomes and servicing abilities.
Mr Lawless claimed that stricter credit conditions will reduce home-buying activity if they are implemented.
Additionally, it will increase the headwinds of increasing housing affordability, higher levels for newly built supply, and stalled migration to other countries.
He said, “Of course the tailwind of persistently high mortgage rates and improving economic circumstances once lockdowns have been eased or lifted will help keep a floor beneath housing demand.”