One of the reasons sighted by numerous market commentators as a reason for the RBA to not cut rates yesterday was that it could lead to further strong gains for property prices, particularly in Sydney and Melbourne.
It would merely add more fuel to what is an already-hot property market, decreasing affordability and, potentially, create greater imbalances that could ultimately undermine Australia’s financial system in the future.
As has been well documented, the RBA did cut rates yesterday, taking the cash rate to a fresh all-time record low of just 2.00%.
Soon after the RBA decision was made, ratings agency Fitch released a brief statement titled “RBA Rate Cut Increases Need for Greater Macro-Prudential Response”. Echoing the concerns raised above, they suggest that “the Reserve Bank of Australia’s (RBA) recent interest rate cut is likely to lead to a strengthened macro-prudential response from the Australian Prudential Regulatory Authority (APRA) for the Australian banking system”.
That is, in the wake of yesterday’s rate cut, there’s now likely to be stricter policies put in place to ensure the already-hot housing markets of Sydney and Melbourne don’t get any hotter as a result of record-low interest rates.
Here’s the possible actions Fitch expects to see moving forward.
“APRA has targeted certain higher risk areas such as investor mortgages, indicating growth in excess of 10% per annum would trigger closer regulatory monitoring and may lead to tougher capital requirements. In addition, APRA could use a set of other macro-prudential tools which may include a combination of debt-servicing requirements, additional capital requirements and/or loan-to-value ratio (LVR) restrictions, depending on each lender. Given the existence of lenders’ mortgage insurance (LMI), which mitigates the banks’ risk of higher LVR mortgages, debt-servicing requirements and higher capital requirements on a bank-by-bank basis are likely to be the preferred options.”
The ratings agency believes these measures, if implemented, will “allow the regulator to influence banks’ risk appetite, preserving asset quality and limiting potential losses in the event of an economic shock”.
However, should these steps not be forthcoming, Fitch warns that it could fuel “further growth in potentially higher-risk loan types, such as interest-only and investor loans” which, in turn, could increase risks in the housing market, the mortgage portfolios of banks and lead to further house price appreciation, particularly in Sydney and Melbourne.
With levels of household indebtedness high by global comparisons, and with interest rates now potentially at-or-near the bottom of the current RBA easing cycle, this would be a concerning development should it occur.
Now, as has been the case since the RBA first cut this year in February, many will be watching the developments in investor loan growth and housing prices.
Should they accelerate rather than decelerate as was the case back then, expect the calls for further regulation to increase just as fast.