- RBA acknowledges low interest rates creates the risk of excessive borrowing
- Rising expectations -> rise in risk taking -> house prices rise beyond fundamental values
- RBA and APRA both have stated that lending standards "have not deteriorated"
In their latest Financial Stability Review for April 2021, the Reserve Bank of Australia (RBA) has acknowledged that ultra-low interest rates and rising asset prices (particularly house prices) create a risk of excessive borrowing.
After falling by almost 2% between April and September 2020, housing prices have since more than recovered. CoreLogic’s national home value index showed a monthly increase of 2.8%, the highest in 32 years.
Housing demand has been driven by low interest rates, stimulus payments boosting household income, temporary support for first home buyers, and the HomeBuilder program.
Rising asset prices are helping the economic recovery and reducing the risk that falling prices would result in losses on loans financing those assets.
However, the RBA has warned that if expectations continue to rise, this will lead to increased risk-taking and borrowing.
And if housing prices continue to rise beyond the end of stimulus payments slowing household income growth, they could be pushed beyond their fundamental values.
This could lead to a correction in prices, which if borrower income fell could expose lenders to large losses on higher debt.
Despite consistently issuing this warning, the central bank has said lending standards are largely unchanged and remain robust. Right now, there is no need to tighten credit lending standards or raise interest rates, the RBA argues.
In fact, a rise in interest rates looks unlikely, considering the RBA is fully committed to growing the broader economy – primarily employment (disappointing inflation hawks).
As reported before on The Property Tribune, credit intervention would only be warranted if there is a material rise in metrics such as debt-to-income ratios, loan-to-income ratios, or high loan-to-value ratio (LVR) lending.
Despite each of these metrics rising in the final quarter of 2020, the Australia Prudential Regulation Authority (APRA) is on the same wavelength as the RBA – lending standards remain healthy enough to keep any intervention at bay, they say. At least for now.
Some of the rise in LVR lending reflects the large number of first home buyers who responded to fiscal and monetary stimulus, making homes more attractive to rent. The RBA argues that there is little evidence to suggest this has been an especially risky form of lending.
Overall, the bank seems assured that households have built up bigger cash buffers, reducing the risks of large-scale defaults on housing and business debt.