regulation
Source: Canva.
  • Recent RBA study found that macroprudential policies reduced financial risk
  • Interest rates are likely to remain at historic lows until early 2024
  • Macroprudential tools are still relatively new in Australia

A new study from the Reserve Bank of Australia (RBA) found that macroprudential policies implemented between 2014 and 2018 contributed to a reduction in risk of the financial system.

There is seemingly never a better time for this study to be released. With all the talk of a booming property market and young people in particular are being priced out of the housing market, what to do about skyrocketing house prices is back at the forefront of public policy.

Interest rates are likely to remain at historic lows until early 2024, as has been repeatedly emphasised by the central bank board.

As long as wage growth does not reach the bank’s targets, interest rates will not be raised, and in any case, will not be used to tame galloping house prices. So, expect the house price rises to continue.

Regulate

Another organisation watching the markets is the Australian Prudential Regulation Authority (APRA).

The likely course of action by the banking regulator would be to impose ‘macroprudential policies’, which are essentially tools used to restrict bank lending.

For example, if APRA thought lending was getting out of hand and standards were being lowered to unacceptable levels, they could call for a tightening in lending rules.

This might mean that borrowers may only be allowed to borrow triple their income for a deposit as opposed to six times. Another example could be that they must put down 30% on a house deposit instead of 20%. This limits the pool of people capable of participating in the housing market, and acts to cool it down.

2014-2018 experience

In 2014, banks were required to limit their annual growth in investor mortgages to no more than 10%. The second policy, announced in early 2017, required banks to limit their lending in interest-only mortgages to no more than 30% of their total new housing lending.

The RBA study wanted to uncover how successful these policies were. The paper notes that macroprudential tools are still relatively new in Australia, so the banking regulator faced unique challenges.

It was found that both policies achieved their aim, by reducing aggregate growth in the types of lending APRA was targeting.

Ultimately, the study concluded that such policies did contribute to a reduction in risk of the financial system.

This recent study seems to strengthen the case for using macroprudential policies. With investors returning to the housing market, combined with strong owner-occupier demand, the likelihood of such policies being implemented is becoming higher due to the perceived risk to the broader financial system.

Since early March, ANZ Research has been of the view regulators will need to step in to cool the housing market before the end of 2021.

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