What do you do if you are a central banker trying to kickstart a sluggish economy only to inadvertently spark rampant speculation in the housing market?
That's the dilemma facing the Reserve Bank of Australia. And the answer could be; macro-prudential controls, which, if implemented, would restrict housing loan growth, curb bank earnings lifts and possibly push first home buyers out of the market.
And the Commonwealth Bank (CBA), as the nation's biggest housing lender, would appear to be the most vulnerable to any such move.
RBA governor Glenn Stevens has lowered the official cash rate to record lows as the economy transitions from the investment phase of the mining boom in an attempt to stimulate the non-resources sector and employment (see Adam Carr's The low rates realities).
That has led to a spike in property investment loans and a sharp lift in housing prices, particularly in Sydney where auction clearance rates continue to sit above 80%, the kind of conditions only experienced during booms.
In the past, central banks tended to employ the one blunt weapon, interest rates. Since the financial crisis, however, the scope of their mandate has been broadened and they have used increasingly nuanced methods to achieve their aims.
Macro-prudential controls such as limiting high risk loans by insisting on more comfortable loan to value ratios – particularly for LVRs of greater than 80% – have been employed in Canada, more recently in New Zealand and now are being hinted at by regulators here.
The Australian Prudential Regulatory Authority recently warned banks to not lower their lending standards, a not-so-subtle shot across the bows that carried an implicit warning that it was prepared to impose tighter lending restrictions.
That followed APRA statistics pointing to a sharp lift in loans with LVRs above 90%, with interest only loans issued in the June quarter accounting for almost 40% of the total of new home loans.
Research by Macquarie indicates that the CBA has dramatically lifted its share of high margin 80% LVR loans in New Zealand, lifting its exposure by 30% in the past year. Australia and New Zealand Banking Group (ANZ), however, remains the leader in the high risk category, lifting its exposure by 9% during the year.
Given the imposition of restrictions by the RBNZ, that growth will not be repeated in the year ahead.
The big four banks have launched a major lobbying blitz against any such move in Australia, arguing that macro-prudential controls would hurt first home buyers the most and curb the nascent recovery in the economy, particularly in housing construction which would be spurred on by stronger real estate prices.
Clearly though, it is a topic being batted around by banking regulators and monetary authorities.