Photographer: Brendon Thorne/Bloomberg

RBA Sees Lending Curbs Hurting Borrowers But Boosting Resilience

  • Household balance sheets, housing remain core area of interest
  • Central bank says developing top-down stress test for lenders

Recent regulatory measures are constraining some borrowers but will strengthen the resilience of household and bank balance sheets, the Reserve Bank of Australia said in its semi-annual Financial Stability Review.

Main Takeaways

  • While household balance sheets and the housing market “remain a core area of interest,” the central bank seems more confident on where it stands.
  • Conditions are “relatively weak” in the Brisbane apartment market as a large increase in supply pushes down prices and rents; yet there are few signs of “significant settlement difficulties” to date.
  • Balances in mortgage offset accounts and redraw facilities remain about 17 percent of outstanding loans, or more than 2 ½ years of scheduled repayments. But these mask “substantial variation” as about one-third of mortgages have less than one month’s buffer.
  • Property investors have increased steadily over past few decades: 11 percent of Australian adults, or just over 2 million people, had one or more investment properties in fiscal 2015. The share of these with mortgage debt has remained around 80 percent since 2008.
  • The RBA is developing a “top-down” stress testing framework for banks. The model can highlight the sensitivity of the overall banking system to a change in parameters; it’s also more transparent to public authorities as it can clearly identify how shocks propagate through the bank’s balance sheet.

State of Play

The RBA is making no attempt to play down financial risks emerging from a prolonged period of record-low interest rates, yet it appears to be commentating from a position of greater strength than six months ago. Regulatory changes have made interest-only loans far less attractive and borrowers are forced to use more realistic loan to valuation metrics. Governor Philip Lowe, who has been at the forefront of financial risk in central banking for 25 years, really does appear to be applying his expertise in the field to shore up the Australian economy.

Key Quotes

  • “Household indebtedness is high and, against a backdrop of low interest rates and weak income growth, debt levels relative to income have continued to edge higher.”
  • “In Sydney and Melbourne, housing price growth has slowed and auction clearance rates have fallen. A range of factors have contributed to the slowing, including increased housing supply, higher interest rates for some borrowers, and an apparent reduction in demand from foreign buyers. In Melbourne, these factors appear to have offset the impact of strong migration flows into Victoria.”
  • Banks’ “share of non-performing housing loans increased a little. However, banks’ non-performing housing loans are mostly well secured, with the impaired share very low. By state, delinquencies are highest in Western Australia, Queensland and South Australia. In liaison with the Reserve Bank, some banks continued to report that they do not expect loan performance to deteriorate much further in Western Australia.”

The Backdrop

Australia has held rates at 1.5 percent since last August, amid record household debt at 194 percent of income that’s helped fuel Sydney and Melbourne’s scorching property-price growth. The RBA, which has been waiting to see the impact of macroprudential measures on home lending, has recently been encouraged by signs that conditions are easing in Sydney. Meanwhile, traders are pricing in a 52 percent chance of a rate hike in July.

But Lowe has made clear he’s in no hurry to follow global peers moving rates higher, because Australia didn’t have to cut as low or undertake quantitative easing, and inflation remains weak. In the meantime, a stronger currency has proved unhelpful for exporters while signs of higher investment are encouraging.

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