- RBA boss says he would be worried if Australians started “borrowing ridiculous amounts of money” in a speculative way
- RBA remains dovish, focusing their attention on reducing unemployment
- The debate over easing lending laws has big implications for the housing market
Governor of the Reserve Bank of Australia (RBA), Philip Lowe has issued a warning to homebuyers to not borrow “ridiculous amounts of money in a speculative way”.
This comes after a Senate Committee recently backed the proposal to wind back responsible lending laws, arguing that home loan approvals were taking too long and were too invasive.
As reported on The Property Tribune, the proposal to ease lending standards was met with furious opposition from consumer groups.
Advocates defending the proposal said the changes would not undermine consumer protections, as the principle of responsible lending was still embedded in other bank regulations.
But Dr Lowe weighed in on the developments, warning that easing lending standards would potentially cause a speculative boom, driving up house prices even further and creating financial risks.
This warning should come as no surprise, considering Dr Lowe has repeatedly emphasised the importance of ensuring lending standards remain sound and do not deteriorate.
“What would concern me, if we saw on the back of these rising asset prices, lending standards deteriorate and people go into the bank and borrowing ridiculous amounts of money in a speculative boom. We are not at this point, but we are watching carefully,” he said.
Housing market soars
There can be no doubt that ultra-low interest rates have caused upward pressure in the housing market.
Although we are not seeing high inflation in the Consumer Price Index (CPI), asset price inflation is crystal clear.
According to the Australian Bureau of Statistics (ABS), the Residential Property Price Index rose 4.5% in the last year, with auction volume results from CoreLogic clearing above 80% for the seventh week in a row.
All capital cities have recorded rising house values according to NAB’s National Housing Index, and the Commonwealth Bank of Australia has recently predicted 16% housing market growth over the next two years.
Housing bubble?
Despite worries of an out-of-control housing boom, Dr Lowe remains adamant that the central bank does not target housing prices, but this effect is part of the transmission mechanism when easing monetary policy.
Rather, the central bank’s primary concern is employment and those who don’t have a job and whose wages aren’t growing at sufficiently high rates.
“So to the extent that anything keeps me awake at night, what worries me is the social and economic cost from a protracted period of unemployment.”
Again, this sentiment ignores the concerns of inflation hawks (see this article).
Is the current situation of the housing market an unsustainable bubble?
As reported on The Property Tribune, Dr Lowe does not seem to think so (assuming lending standards remain sound), arguing that there have been large rises and falls in the property market over the past few years and that the housing price index is still around the same level as four years ago.
“The equity market is below its previous peaks, housing prices in Sydney and Melbourne, while they’re rising, they’re not really higher than they got to a little while back in some of the smaller capital cities,” Dr Lowe explained.
President of REIWA, Damian Collins, has made similar comments, saying that even if the Perth property market rose 25% this year, for example, that would only put the market back to 2014 prices.
With eased lending standards set to cause further upward pressure in the property market according to most experts, perhaps the opinions of many who do not think we are in a housing bubble will change.
For now, the debate on monetary policy and easing lending standards continues…
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