Federal Treasurer Josh Frydenberg has sent the strongest signal yet that lending rules may be tightened in Australia, giving an interview to the AFR that suggested that he will recommend that APRA takes measures to constrain risky lending.
While Australia’s housing boom continues, the level of household indebtedness has also risen and presents a clear danger to that explosion in growth.
The RBA, which is set to announce a cash rate decision next Tuesday, has said that it will not raise the basic cost of money until 2024. The government can pull some other levers, such as the term funding changes that came in at the start of July, and the next logical step to control lending is via APRA.
The news comes days after Matt Comyn, CEO of CBA, spoke at a Parliamentary hearing about how his bank was taking steps to self-regulation, which it did back in June by raising the rate against which potential borrowers are assessed.
“I think it’s the right decision for the Treasurer to have taken, though not necessarily and easy one,” said Saul Eslake, one of Australia’s leading economists. “Some of his colleagues, I suspect, would have been against it, but I think he’s on the right track.”
“The Bank for International Settlements, which is the central banker’s central bank based in Basel – publishes the only available consistent data on the levels of debt around the world.”
“Their most recent figures came out last week, and are for March this year: they show that Australian household debt is equal to 123.4% of our GDP, the highest of any country except Switzerland.”
“That sounds scary, but as is always the case with debt, what matters is not so much the level as the ability to service it. As interest rates are so low, that level of debt is arguably less scary than times in the past when we’ve had less debt but higher interest rates.”
“It is absolutely correct that the RBA reduction in interest rates has contributed to the increases in house prices and household debt for the last 18 months - and I think that’s undeniable – that does not been that they were wrong to do it or that they should now be raising rates.”
“The RBA is right to say that they well keep rates at present lows until inflation is back in the target band, and they shouldn’t raise rates to dampen housing price inflation. Rather, there are other tools that can be used.”
Frydenberg’s actions reflected the wider global outlook that is being pushed by global institutions to keep lending in check.
“Both the OECD two weeks ago and the IMF last Friday explicitly recommended macroprudential controls on risky mortgage lending should be tightened,” said Eslake. “In Australia, it isn’t up to the Reserve Bank to do that. We have handed prudential supervision of lenders to a separate authority, APRA.”
“The New Zealanders never did that, and significantly, last week, the Reserve Bank of New Zealand tightened its provisions on new mortgages that can be written at an LVR of above 80%. The Taiwanese central bank did much the same last week too, and Singapore and Hong Kong have done this.”
“The OECD noted two weeks ago that Australia was one of the few advanced economies that didn’t have any kind of limit on high-risk lending. The New Zealanders have foreshadowed the introduction of controls on high debt-to-income ration lending as well. My view is that we should do either or both of those as well.”
