- RBA deputy governor Guy Debelle says regulatory curbs on investor lending have “meaningfully reduced” Australia’s household debt risk.
- He said the buildup of riskier investor loans make Australia’s economy more vulnerable to an external shock.
- However, the market is unlikely to ‘collapse under its own weight’.
- Debelle also addressed risks surrounding tighter lending standards and the switch out of interest-only loans.
Regulatory measures to curb growth in investor lending have “meaningfully reduced” risks in Australia’s housing market, RBA deputy governor Guy Debelle says.
Debelle’s comments were made in a panel discussion on the effectiveness of the restrictions — the most recent of which was a 30% cap on new interest-only loan flow in March 2017.
He noted that strong growth in investor loans increases the probability that segments of the market would overheat.
That could lead to a “subsequent sharp unwinding”, particularly because investors — as opposed to owner-occupiers — are more likely to sell their homes into a falling market.
However, in Debelle’s view, risky levels of growth in investor loans are unlikely to be the central catalyst for a broader economic crash.
Here’s how he explained it:
I don’t see the riskiness of the borrowing as being the source of the negative shock. My concern is for its potential to be an accelerator to a negative shock from another source. To put it another way, I don’t regard it as likely that household borrowing will collapse under its own weight.
Rather, if a negative shock were to hit the Australian economy, particularly one that caused a sizeable rise in unemployment, then the risk on the household balance sheet would magnify the adverse effect of that shock. This would have first order consequences for the economy and hence also for monetary policy.
Debelle also addressed the potential fallout
Some analysts have raised concerns about accelerated falls in house prices if banks cut back on the amount of money they are willing to lend.
Debelle noted in previous years, many home loan applicants were offered more money by the banks than they actually wanted to borrow.
That trend has now reversed. Debelle said there are some borrowers who are already close to their loan-limits who will be adversely affected. However, the total pool of prospective borrowers in that category is relatively small.
“Our assessment is that the aggregate impact is less than it would appear on the face of it,” he said.
He also doesn’t think ongoing shift from interest-only loans into principal and interest repayments represents a “material risk” to the economy.
Particularly as the broader macro backdrop remains positive — a view reinforced by today’s strong labour market data.
The majority of interest-only loan terms run for five years, and tighter lending standards mean borrowers may struggle to refinance unless they switch into P&I repayments.
Recent evidence suggests a meaningful number of IO borrowers are switching into P&I repayments ahead of schedule.
But interest-only lending peaked in early 2015, which means IO loan expiration are expected to peak over the next two years.
“It is also worth remembering that this process has already being going for quite some time, but we have yet to see it have a material effect on arrears rates,” Debelle said.
You can read a full version of his speech here.