The Reserve Bank of Australia has cautioned against new policies that may encourage greater supply of mortgage finance in Australia, noting they could have implications for systemic risk.
The comments, which represent the central bank’s strongest warning on home lending growth to-date, were released as part of the RBA’s second submission to the Financial Services Inquiry.
“The supply of mortgage finance in Australia is ample,” the RBA said. “Therefore, any proposed policies that could further increase that supply should be subject to rigorous analysis of their costs, benefits to consumers and risks to financial stability.”
The interim report from the inquiry’s panel, led by former Commonwealth Bank boss David Murray, raised a number of options to boost mortgage market competition, which the RBA stressed may result in a heavier lending bias towards housing, to the detriment of the broader economy.
“These options should be assessed in terms of the end benefits and risks for consumers and the broader economy,” the submission read.
“Relevant considerations include whether the policy change might accelerate household borrowing, and the associated implications for systemic risk and the available funding for Australian businesses.
“As noted in the Bank’s initial submission, housing is generally not a particularly risky asset, but because of its size, importance to the real economy and interconnectedness with the financial system it poses systemic risk.”
The central bank again weighed into the superannuation debate, offering its agreement that super fund fees were too high.
More worrying for the RBA, however, is the use of leverage by super funds, with self-managed super funds (SMSFs) posing a particular threat to the financial system.
“While still in its infancy, the use of leverage by superannuation funds to enhance returns appears to have been mainly taken up by self-managed superannuation funds,” the RBA said.
“The Bank has previously commented on the risks that may arise from geared property investment through SMSFs, which may act as an additional source of demand that exacerbates property price cycles.
“Nonetheless, some limited leverage for liquidity management purposes may be appropriate.”
The latest submission largely agreed with the conclusions of the inquiry's interim report, but the central bank cautioned on moving too fast, too soon. With significant regulatory reform underway around the world, the Reserve Bank suggested taking a steady approach on new rules and requirements.
“This is a challenging area for policy development; hence, care should be taken in implementing new policies and consideration given to how these changes may interact with pre-existing policies,” the RBA said.
The Reserve Bank has warned that moves to unleash more home loan competition could increase risk in the financial system, by pumping even more credit into the housing market.
With the big four banks controlling 80 per cent of the $1.3 trillion mortgage market, smaller lenders are ramping up pressure on the government to take steps they claim would help level the playing field.
Regional banks, credit unions and building societies are this week urging the financial system inquiry, being chaired by former banker David Murray, to change regulations that give the Commonwealth Bank, Westpac, NAB, ANZ and Macquarie a significant cost advantage when making home loans.
But a new submission from the Reserve Bank has cautioned against policies that could boost competition in home loans, but come at the expense of financial stability.
The submission, published on Wednesday, warns that adopting competition policies raised in Mr Murray's interim report last month "could result in relatively more finance being directed towards housing," which it views as a source of "systemic risk" to the economy.
"The supply of mortgage finance in Australia is ample. Therefore, any proposed policies that could further increase that supply should be subject to rigorous analysis of their costs, benefits to consumers and risks to financial stability," its submission says.
The central bank's comments highlight the balancing act confronting Mr Murray as he seeks policies that promote a competitive financial system without compromising stability.
When the Coalition first pushed for the inquiry when in Opposition, competition was top of mind. This came amid concerns about big bank power after lenders' unpopular decisions on interest rates.
But the Reserve Bank said options to lift competition needed to be assessed with regard to their impact on the entire economy.
The RBA is of course correct. Further increasing the availability of credit would do what it has always done: raise household debt and bid-up house prices even further, while potentially also crimping lending to productive businesses. It would be a retrograde step and further reduce housing affordability while increasing financial stability risks.
That said, one does wonder why the RBA has taken until now to speak out about this issue. The proportion of bank loans going housing has been rising and is at an historical high, whereas the share of loans to business is at an historic low.
Moreover, the ratio of outstanding mortgage debt to household disposable income is at an historical high, and is rising fast as outstanding mortgage credit growth – 6.4% in the year June 2014 – far exceeds the growth in wages (2.6%).
Blind Freddy can see that Australia already has a mortgage problem, yet you would hardly know it from the actions and mutterings from the RBA.
All of which also makes the RBA’s opposition to macro-prudential controls of high risk mortgage lending – which Glenn Stevens has previously refered to as “dreaded macroprudential tools” and “the latest fad” – all the more delinquent.
The RBA is of course correct. Further increasing the availability of credit would do what it has always done: raise household debt and bid-up house prices even further, while potentially also crimping lending to productive businesses. It would be a retrograde step and further reduce housing affordability while increasing financial stability risks.
That said, one does wonder why the RBA has taken until now to speak out about this issue. The proportion of bank loans going housing has been rising and is at an historical high, whereas the share of loans to business is at an historic low.
Moreover, the ratio of outstanding mortgage debt to household disposable income is at an historical high, and is rising fast as outstanding mortgage credit growth – 6.4% in the year June 2014 – far exceeds the growth in wages (2.6%).
Blind Freddy can see that Australia already has a mortgage problem, yet you would hardly know it from the actions and mutterings from the RBA.
All of which also makes the RBA’s opposition to macro-prudential controls of high risk mortgage lending – which Glenn Stevens has previously refered to as “dreaded macroprudential tools” and “the latest fad” – all the more delinquent.
1. RBA isn't afraid of MP Tools. 2. APRA is already using MP Tools. 3. There is no shortage of credit. If the RBA have a concern then it's probably afraid the smaller banks will be squeezed into accepting skinny margins.
Any expressed market opinion is my own and is not to be taken as financial advice
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