Is it time Australia took the plunge and introduced measures to slow household lending? Given our similarity to both New Zealand and the United Kingdom -- from heritage, institutions and yes, housing -- it is time that we stopped being complacent and took steps to limit the potential fallout from a housing downturn.
Last week the Bank of England followed the lead of a range of other countries -- such as New Zealand and Canada -- and introduced measures which intervene in mortgage lending markets. Under the new rules, only 15 per cent of new home loans will be allowed to have loan-to-income ratios of more than 4.5 times (Will APRA follow in the BoE’s footsteps to reduce mortgage risk? June 27).
This followed the Reserve Bank of New Zealand, which has already introduced temporary restrictions on lending with high loan-to-valuation ratios. Under these guidelines, banks are required to restrict new lending with LVRs over 80 per cent (meaning a deposit of less than 20 per cent) to no more than 10 per cent of their total residential mortgage lending.
But despite a few casual remarks, the Reserve Bank of Australia and the Australian Prudential Regulation Authority have been unwilling to make the same commitment to financial stability.
Household liabilities ticked up to 114 per cent of nominal GDP in the March quarter, the highest level on record, with outstanding household debt rising by 6 per cent over the year. It’s interesting to note that household debt is some five times larger than general government liabilities.
If that was sufficient to create an imaginary budget emergency what should we make of household indebtedness? And why hasn’t the federal government instructed the RBA or APRA to do something about it?
I must stress that there is nothing fundamentally wrong with credit -- nor is there a level of debt that is ideal. We cannot understate the important role that credit and financial markets play in the efficient allocation of resources and the financing of long-term assets.
But there are considerable risks to excessive indebtedness. We are currently one of the most highly indebted countries in the world. Our household sector, for example, has more liabilities than the US prior to the global financial crisis.
That crisis provided a fair example of what can happen to economic activity when credit markets shut down or operate inefficiently. We have witnessed how devastating deleveraging can be for households and businesses alike. It’s precisely why we cannot afford to have our financial regulators fall asleep at the wheel.
The introduction of macroprudential policies is not about saying a bust is imminent -- both the UK and New Zealand economies appear set for reasonably strong growth over the next couple of years.
Instead it is about risk management. It is the acknowledgment that ever rising house prices and excessive mortgage lending will leave our financial system and economy more vulnerable to economic shocks. It also has the potential to curb spending and crowd out business investment.
This is particularly important when you consider that the only thing standing in the way of an Australian recession is the Chinese economy -- an economy we barely understand and few others do either. Chinese demand for iron ore and coking coal has proved a once-in-a-lifetime boon for the Australian economy, but with our terms-of-trade declining and China looking to curb excess capacity, our reliance on China could suddenly take a darker turn.
The simple fact is that we cannot afford to be lax on this issue. Not when we are dealing with a $5 trillion asset class, four major banks that each have massive exposure to housing assets, and state governments that are overly reliant on stamp duty to balance their books.
Even if the RBA was good at forecasting -- in reality it’s terrible -- doesn’t it make sense to take out an insurance policy?
A few months ago RBA governor Glenn Stevens noted that some Australians had become complacent following 23 years of uninterrupted growth. Could the same be said of our financial regulators?