Stevens Signals RBA Considering Ways to Curb Home Lending

Reserve Bank of Australia Governor Glenn Stevens signaled he’s considering steps to limit home loans to investors, who are distorting the housing market.

“Investor finance is growing at double-digit rates,” which is a concern, Stevens told an economics forum in Melbourne today. “I have certain skepticism about macro-prudential tools as a panacea, but I remain open to using them if it seems sensible to do so and that’s the kind of thing we have in mind right now.”

Australia’s central bank is discussing possible measures with other regulators to strengthen lending practices, it said yesterday in its semiannual financial stability review. Policy makers have stepped up warnings on a hot housing market in Sydney and Melbourne, saying accelerating price gains in the country’s two biggest cities may threaten an economy where interest rates have been cut to a record low.

Treasurer Joe Hockey called on regulators Sept. 21 to closely monitor the housing market and said any measures to stem home-loan growth should be targeted and temporary.

“There is no indication of what additional steps are under consideration to rein in investor activity,” Commonwealth Bank of Australia Chief Economist Michael Blythe said in a research note. “But the consensus favors serviceability tests that include larger interest-rate buffers, a higher allowance for living expenses and the exclusion or reduction of uncertain income streams.”

Investor Housing

Investor housing loan approvals are almost 90 percent higher in New South Wales state than two years ago and 50 percent higher over the same period in Victoria, the RBA said yesterday. Home prices jumped 16 percent in August from a year earlier in Sydney, the capital of New South Wales, and they rose 12 percent in Melbourne, Victoria’s capital.

Investor finance is almost half the flow of new home loan approvals, Stevens said today, noting the large amount of interest-only loans amid rising house prices. “I think it’s perfectly sound and sensible to ask ourselves whether there are tools that might at least lean on that a bit.”

The RBA lowered borrowing costs by 2.25 percentage points in an almost two-year easing cycle to 2.5 percent in August last year seeking to boost industries like construction as mining investment ebbs.

Little Downside

Stevens said he didn’t see much downside in implementing macro-prudential tools. “The worst that could happen is that it doesn’t have that big of an effect,” he said. Yet if such steps “helped us to square in some small way all the conflicting things that we have going on, that is worth a try.”

Australia has the world’s most overvalued housing market on a price-to-income basis after Belgium and Canada, according to the International Monetary Fund. Home prices are expected to rise between 8 percent and 12 percent in 2015 in Sydney, driving growth of as much as 9 percent across Australia’s major cities, SQM Research Pty said last week. Melbourne will see gains of between 5 percent and 9 percent, Sydney-based SQM predicted.

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